Discover Profit Rises as Customer Spending Climbs

Discover Financial Services, the U.S. payments network whose shares have outperformed its three bigger rivals this year, reported profit that beat analysts’ estimates as credit-card spending increased.

Third-quarter net income climbed 8.6 percent to $644 million, or $1.37 a share, from $593 million, or $1.20, a year earlier, the Riverwoods, Illinois-based lender said today in a statement. The average estimate of 22 analysts surveyed by Bloomberg was $1.34.

Chief Executive Officer David Nelms, 53, is seeking to drive more transactions to Discover’s payments network while expanding consumer banking beyond credit cards. Discover began offering mortgages and has increased student-lending. The firm also partners with PayPal Inc., the online payments processor.

Earnings “were driven by robust card-loan growth, strong revenue growth and near historically low credit performance resulting in continued better than industry returns,” Nelms said in the statement.

Discover climbed 13 cents to $64.51 at 4:33 p.m. in extended trading in New York. The shares gained 15 percent this year through the close of regular trading, while Visa Inc., MasterCard Inc. and American Express Co. have all declined.

‘Well-Positioned’

Revenue increased 6.2 percent to $2.19 billion, matching estimates of analysts surveyed by Bloomberg. Total loans climbed 7.4 percent to $67.4 billion as credit-card lending advanced 6.6 percent. Provisions for loan losses rose 6.3 percent to $354 million.

“The company is well-positioned for growth, taking market share in both the lending and network components of its business,” Jason Arnold, an analyst at RBC Capital Markets, said in a note before results were announced.

Discover is considering making changes to its rewards program to make it easier for customers to redeem points for cash, Nelms said today on a conference call. That could result in a one-time charge of as much as $185 million in the fourth quarter, he said.

“We haven’t made any final decisions,” Nelms said in a phone interview. “We do expect to be simplifying on the back-end the redemption. Our program does have a limited number of ways that someone might not be able to redeem.”

Non-interest expense increased 5.6 percent to $827 million as employee compensation, marketing and professional fees rose, Discover said. Spending on Discover’s payments network climbed 3.6 percent to $80.2 billion.

Unemployment Falls

U.S. unemployment fell to a six-year low of 5.9 percent in September, the Labor Department said, while consumer confidence as measured by the Thomson Reuters/University of Michigan preliminary sentiment index rose this month to the highest level in seven years. Holiday sales may increase the most in three years, according to a National Retail Federation estimate.

American Express, the biggest U.S. credit-card issuer by purchases, said Oct. 15 that third-quarter profit rose 8.1 percent as spending on its network climbed. Capital One Financial Corp., the bank that gets more than half its revenue from credit cards, reported profit from continuing operations that matched analysts’ estimates. Synchrony Financial, the biggest private-label card issuer, said Oct. 17 that net income fell 15 percent to $548 million in its first report as a publicly traded company.

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