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Discover 1Q profit jumps 36 pct. as card use rises

By Alex Veiga
AP Business Writer / March 21, 2012
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LOS ANGELES—Discover Financial Services said Wednesday that its first-quarter profit jumped 36 percent as customers used its namesake credit card more and racked up higher balances but also improved their payment habits.

Customer transactions with the Discover card grew 7 percent, and credit card balances rose 3.6 percent to $45.9 billion. Transactions processed by Discover-owned networks rose 8 percent.

Late payments and defaults fell to 25-year lows, which enabled Discover to release some of the reserves it had set aside to cover unpaid balances, and that also helped boost the Riverwoods, Ill., company's results.

Chairman and CEO David Nelms said he doesn't anticipate a dramatic increase in the pace at which consumers are taking on debt, though they are continuing to spend more. That's because many consumers have just gone through a period where they focused on paying off their debt, Nelms added during a conference call with Wall Street analysts.

Nelms said he expects the industry eventually to resume growing at about the same rate as the nation's gross domestic product. He anticipates that purchases will drive increases in card use, rather than balance transfers or rate changes.

Discover reported that its net income after paying preferred dividends climbed to $624 million, or $1.18 a share, in the three months that ended Feb. 29. That compares with net income of $459 million, or 84 cents a share, a year earlier.

Total revenue rose 6 percent to $1.84 billion from $1.73 billion a year earlier.

Analysts polled by FactSet were expecting a profit of 94 cents a share on total revenue of about $1.84 billion.

Discover said its net interest income, or money earned from loans, grew 11 percent to $1.29 billion from $1.17 billion a year earlier.

The increase was driven primarily by higher income from the company's private student loan and direct banking businesses, and lower interest expense.

Private student loans rose by $3 billion, including the acquisition of a $2.4 billion student loan portfolio in the fourth quarter of 2011. Personal loans grew $764 million from the prior year.

Discover ended the quarter with $56.3 billion in loans, up 9 percent from a year earlier, but down 1.8 percent from the fourth quarter.

The share of credit card balances that were at least 30 days past due was 2.22, down 137 basis points from a year earlier and 17 basis points from the fourth quarter. The rate at which Discover wrote off credit card balances as unpaid declined to 3.07 percent in the quarter, down 289 basis points from the prior-year quarter and down 17 points from the fourth quarter.

The economic shakeout of the last few years has left credit cards in the hands of more affluent consumers who are better able to pay their bills in full each month, while those with lower credit scores and presumably less ability to pay are now less likely to use credit.

Tighter underwriting standards also have pushed loss rates lower.

Discover set aside a $152 million provision for loan losses, down 64 percent from a year earlier.

As a result of the improved payment behavior, Discover released $226 million from its reserves set aside to cover bad loans.

Shares ended regular trading down 22 cents at $31.64. The stock slipped another 36 cents to $31.28 in extended trading after the company released its earnings results.

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