Discover Falls After Missing Estimates: Chicago Mover

Discover Financial Services fell the most in almost two months after reporting a third-quarter profit that missed analysts’ estimates as the lender set aside more money to cover soured loans.

The stock was the third-worst performer among 81 companies in the Standard & Poor’s 500 Financials Index, sliding 2.3 percent to $52.48 at 9:52 a.m. in New York, the biggest drop since Aug. 27. Net income declined 6.9 percent to $593 million, or $1.20 a share, from a year earlier, the Riverwoods, Illinois-based firm said yesterday in a statement. That missed the $1.21 average estimate of 22 analysts surveyed by Bloomberg.

Discover, owner of the fourth-biggest U.S. payments network, added $333 million to its reserve for soured loans, a $197 million increase from the third quarter of 2012. 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.”

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 said in a phone 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.

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