June 23 (Bloomberg) -- Discover Financial Services, the credit-card issuer and payments network that outperformed three bigger rivals in the past year, posted a record second-quarter profit as consumers spent more and defaulted less.
Net income for the three months ended May 31 more than doubled to $600 million, or $1.09 a diluted share, from $258 million, or 33 cents, in the same period a year earlier, the Riverwoods, Illinois-based company said today in a statement. The average estimate of 19 analysts surveyed by Bloomberg was for adjusted earnings per share of 75 cents. Results were aided by a $401 million release from loss reserves.
Chief Executive Officer David Nelms is boosting dividends and buying back stock as Discover benefits from fewer soured loans and expands beyond card-lending. Losses on uncollectible card loans narrowed to 4.82 percent in May from 8.82 percent a year earlier, Discover said in regulatory filings.
“It certainly is a story of improving quality, that’s been the main theme of the last few quarters,” said Michael Taiano, a Sanford C. Bernstein & Co. analyst, who recommends that investors “hold” Discover shares. “The revenue side is really where the questions exist. That’s really where Discover needs to demonstrate an ability to grow.”
Interest income rose 1 percent to $1.57 billion from a year earlier, and credit-card loans fell 1 percent to $45 billion, even as purchases made with Discover cards increased 9 percent to $25 billion, the firm said.
“We’re still waiting for improving consumer confidence and retail and job growth to drive a more normal growth trend in the industry,” said Christopher Brendler, an analyst with Baltimore-based Stifel Nicolaus & Co. who has a “hold” rating on Discover shares. “Once we get into a stronger job market when consumer confidence picks up, people will be more willing to front load their spending.”
Discover rose 17 cents to $23.76 as of 11:17 a.m. in New York composite trading, the only firm in the 82-company Standard & Poor’s Financials Index showing a gain today. The stock had risen 27 percent this year through yesterday, compared with advances of 21 percent for Purchase, New York-based MasterCard Inc. and 16 percent for New York-based American Express Co. San Francisco-based Visa Inc., the world’s biggest bank-card network, has risen 6.1 percent.
The $401 million release from reserves to cover bad loans compared with $277 million in the same quarter last year, as overdue loans dropped to a 25-year low, Discover said.
“Sustained improvements in credit performance have driven substantial releases of credit-loss reserves, a portion of which has been reinvested for growth,” Nelms said in the statement.
Nelms, 50, has been increasing the firm’s student-loan portfolio and broadening its payment-processing network to compete worldwide with Visa, MasterCard and AmEx.
In January, Discover acquired Citigroup Inc.’s Student Loan Corp. in a $600 million deal that made it the third-biggest U.S. provider of private student loans. The purchase helped to boost the firm’s overall loan portfolio by 5 percent to $52.5 billion.
The company said in February that it will buy about $1.1 billion of deposits from Allstate Corp., and last month announced it would buy Tree.com Inc.’s home-lending business for $55.9 million.
Discover tripled its quarterly dividend to 6 cents a share in March and said last week that it may repurchase $1 billion of stock through June 2013.
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