Bloomberg News

Discover CEO Says Fuel Prices Hurt Consumer Confidence

June 29, 2011

(Corrects name of analyst’s firm in last paragraph of story originally published June 24.)

June 24 (Bloomberg) -- Discover Financial Services Chief Executive Officer David Nelms said he remains “guarded” about how much confidence consumers have in the strength of the U.S. economy as they cope with high fuel prices.

“We’ve seen a downturn in consumer confidence in the last couple of months as gas prices picked up,” said Nelms, 50, in an interview yesterday after Discover reported record results for its second quarter. “I would very much like to see a robust pickup at this point of the cycle.”

Discover is the fourth-biggest U.S. payments network, giving Nelms up-to-date insight into how consumers are behaving. While profit more than doubled to $600 million for the quarter ended May 31 at his Riverwoods, Illinois-based firm, Nelms told investors during a conference call that the economy “is still not on firm footing.”

Consumer confidence fell last week as Americans grew more concerned about the economy, according to the Bloomberg Consumer Comfort Index. Stocks dropped yesterday after applications for jobless benefits increased last week by 9,000 to 429,000, and purchases of new U.S. homes declined in May for the first time in three months.

Federal Reserve Chairman Ben S. Bernanke said June 22 that “headwinds” such as increasing unemployment and falling house prices could be stronger than regulators expected. Some fuel prices eased after the International Energy Agency said its members would release crude from strategic reserves. That sent oil prices tumbling 4.6 percent for the day.

Sales Gain

“Our sales are doing well despite not-great consumer confidence,” Nelms said. “We’ve been pleased at how well our sales have grown and how much we’ve been able to get people to spend on Discover cards versus their alternatives.”

Nelms said he’s relying on more U.S. consumers borrowing from Discover instead of his competitors, rather than waiting for existing customers to borrow more.

“Many of our consumers have deleveraged and paid down some of their debt over the last couple of years since the financial crisis,” Nelms said. “Our goal is to grow credit-card loans in the low single digits, but some of our other categories to grow at much, much faster rates.”

Discover’s revenue from interest rose to $1.57 billion from $1.55 billion a year earlier. Credit-card loans, about 85 percent of the firm’s total portfolio, fell 1 percent to $45 billion, even as purchases using Discover cards increased 9 percent to $25 billion.

Reserve Release

The quarterly results were aided by a $401 million release from loss reserves as overdue loans dropped to a 25-year low, Discover said.

Discover rose 30 cents, or 1.3 percent, to $23.89 in New York Stock Exchange composite trading yesterday. They’ve gained 29 percent so far this year, while the Standard & Poor’s Financials Index dropped 6.8 percent.

“The revenue side is really where the questions exist,” said Michael Taiano, a Sandler O’Neill & Partners LP analyst, in a phone interview. “That’s really where Discover needs to demonstrate an ability to grow, for the stock to have material upside from here.” Taiano has a “hold” recommendation on Discover’s stock.

--Editors: Rick Green, Peter Eichenbaum

To contact the reporter on this story: Donal Griffin in New York at Dgriffin10@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.


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