Discover Profit Beats Estimates as Credit-Card Spending Climbs

Discover Financial Services, operator of the fourth-biggest U.S. bank-card network, reported a second-quarter profit that beat analysts’ estimates as customer spending increased.

Net income rose 15 percent to $602 million, or $1.20 a share, from $525 million, or 99 cents, in the same period a year earlier, the Riverwoods, Illinois-based company said yesterday in a statement. The average estimate of 23 analysts surveyed by Bloomberg was $1.15 a share.

Discover is boosting dividends and repurchasing shares as Chief Executive Officer David Nelms wrings value from the firm’s global network, signing payment-processing partnerships with EBay Inc.’s PayPal and SAP AG’s Ariba. The company also benefited as overdue loan payments fell to record lows.

“Discover’s strong overall results were driven by profitable growth in direct banking and continued improvement in credit,” Nelms, 52, said in the statement.

Credit-card write-offs declined 2 basis points from the previous quarter to 2.34 percent as loans at least 30 days overdue dropped to 1.58 percent, according to the statement.

Discover climbed 29 cents to $51 in extended trading yesterday after results were announced. The shares gained 32 percent this year through the close of regular trading, outpacing the 27 percent advance for the 81-company Standard & Poor’s 500 Financials Index.

Card Purchases

Revenue rose 9.4 percent to $2.04 billion in the second quarter from a year earlier, beating the $2.03 billion average estimate of analysts in the Bloomberg survey. Discover card purchases increased 4.4 percent to $27.6 billion and card loans rose 4.8 percent to $49.8 billion. Net interest income increased 8.8 percent $1.43 billion.

Spending on Discover’s Pulse debit network slid 3 percent to $40.1 billion as steps taken by competitors crimped revenue, the company said. Visa Inc. and MasterCard Inc., the two biggest U.S. payment networks, dominate the industry, and processing rules adopted after passage of the 2010 Dodd-Frank Act have made it more difficult for Discover to compete with its larger rivals, Nelms said in a phone interview.

“We’re in an all-out effort to put in place some additional strategies to fight back for what’s been thrown at us,” he said. “I expect it to be a negative growth year, which is always concerning and is not what we’ve historically had.”

Student Lending

Nelms has acquired mortgage and student-lending businesses as he seeks to make Discover less reliant on credit cards, which provide most of the firm’s revenue. Private student loans increased 5.4 percent in the second quarter to $7.93 billion. Personal loans climbed more than 20 percent to $3.51 billion.

Net interest margin, the difference between what a bank pays in deposits and charges for loans, increased 16 basis points to 9.44 percent from a year earlier, Discover said. A basis point is 0.01 percentage point.

The lender released $78 million from reserves it had set aside to cover losses on soured loans, more than double the amount estimated by Moshe Orenbuch, an analyst with Credit Suisse Group AG.

“We’re approaching a level where card charge-offs are as good as they can possibly get,” Nelms said on the call with analysts. “I wouldn’t be counting on a lot more reserve releases.”

The payment-services unit posted a $21 million pretax loss as expenses jumped from a year earlier, including $55 million of costs tied to supporting Diners Club International franchises, according to the statement. Discover said last month that profit would be reduced because it had to acquire some businesses in Europe and regulators revoked the license of the Diners Club franchise in Slovenia.

Discover repurchased $340 million of shares during the three months ended June 30. The quarterly dividend increased 43 percent to 20 cents in May and has doubled since last year.