Discover Profit Drops 6.9% on Boost in Loss Reserves

Discover Financial Services, owner of the fourth-biggest U.S. payments network, posted a 6.9 percent profit drop as it set aside more funds to cover soured loans. The shares fell in extended trading.

Third-quarter net income declined to $593 million, or $1.20 a share, from $637 million, or $1.24, a year earlier, the Riverwoods, Illinois-based company said yesterday in a statement. That missed the $1.21 average estimate of 22 analysts surveyed by Bloomberg.

Discover added $333 million to its reserve for soured loans, an increase of $197 million from a year earlier. The “larger-than-expected loan-loss provision was the primary source of the modest miss,” Jason Arnold, an analyst at RBC Capital Markets, said in an e-mail. That “may lead shares to give a little back.”

Discover fell 2.3 percent to $52.51 at 4:50 p.m. yesterday in extended New York trading, and dropped as low as $50 after results were announced. The shares had gained 39 percent this year through the close of regular trading, outpacing the 27 percent advance for the 81-company Standard & Poor’s 500 Financials Index.

Chief Executive Officer David Nelms, 52, is seeking to drive more transactions to Discover’s global network, in addition to those from the lender’s traditional credit-card clients. The firm said earlier this year that it will help online processor PayPal extend its reach to 2 million brick-and-mortar merchant locations by the end of 2013.

Next Step

Discover is still in the process of signing and implementation. “The next step will be the launch of these various initiatives,” Nelms in an interview. “Profits should follow after that.”

The company sets loan-loss reserves on a forward-looking basis. The recent government shutdown and debt-ceiling standoff weren’t considered when setting the reserves.

“A bigger driver for loan losses is job losses,” Nelms said in the interview. “If our forecast were showing higher job losses we would take that into account.”

Total loans increased 5.2 percent to $62.7 billion from a year earlier, helped by a 4 percent increase in credit-card loans, according to the statement. Discover card sales rose 3.2 percent to $28 billion, and write-offs fell to 2.05 percent, the company said.

“Card loan growth continues to exceed industry growth while charge-offs achieved new record lows,” Nelms said in the statement.

Revenue climbed 2.8 percent to $2.06 billion, matching the average estimate of analysts in the Bloomberg survey.

American Express Co., the biggest credit-card issuer by purchases, said Oct. 16 that third-quarter profit rose 9.3 percent to $1.37 billion on higher worldwide card spending. McLean, Virginia-based Capital One Financial Corp. said the next day that net income slid 5.2 percent to $1.12 billion.