Discover Financial Services (DFS:US), the credit-card lender that struck a partnership with EBay Inc. (EBAY:US)’s PayPal unit, posted a fiscal third-quarter profit that beat Wall Street estimates as fewer loans soured. The stock jumped.
Net income in the period ended Aug. 31 fell 3.4 percent to $627 million, or $1.21 a share, from $649 million, or $1.18, a year earlier, the Riverwoods, Illinois-based company said today in a statement. The average estimate (DFS:US) of 22 analysts in a Bloomberg survey was $1.03 a share.
Discover, the fourth-best performer this year in the 81- company Standard & Poor’s 500 Financials Index through yesterday, climbed to a record last month after announcing a transaction-processing deal with PayPal that will drive more volume to the lender’s network. Chief Executive Officer David Nelms has repurchased shares as write-offs and delinquencies improved.
“It was a great quarter,” said Henry Coffey, an analyst with Sterne, Agee & Leach Inc. in New York, who has a buy rating on Discover shares. “Across the board you had favorable trends in every class of loans except student loans.”
Discover gained 3.4 percent to $38.29 at 10:04 a.m. in New York. The shares advanced 54 percent this year through yesterday and have more than doubled since the end of 2010. The company bought back about 10 million shares of common stock in the quarter for $350 million, according to the statement.
Write-off and late-payment rates at Discover are the second-lowest among the six-biggest U.S. card lenders, after American Express Co. (AXP:US) Loans deemed uncollectible fell to 2.19 percent in August from 3.6 percent a year earlier, regulatory filings show. Loans at least 30 days overdue, a signal of future defaults, dropped to 1.79 percent from 2.49 percent.
Discover wrote off $308 million in soured loans for the quarter, a 33 percent decline from the same period last year. Delinquent loans have reached “historic lows,” the firm said.
Purchases made with Discover cards increased 4 percent to $27.2 billion from a year earlier, the lender said. Net interest income climbed 11 percent to $133 million and credit-card loans rose 4 percent to $48.1 billion.
Discover will give $200 million in refunds to customers and pay $14 million to resolve U.S. regulatory claims concerning the marketing of credit-protection products sold by phone, the firm said last week. Legal costs increased $94 million compared with a year earlier due to expenses associated with the regulatory probe.
The deal with the Federal Deposit Insurance Corp. and Consumer Financial Protection Bureau is the second this year over credit-card add-on products designed to help customers manage debts in case of a job loss or other catastrophic event. In July, the agencies reached a similar settlement with Capital One Financial Corp. (COF:US)
The processing pact with San Jose, California-based EBay will allow PayPal customers, who currently use the service almost exclusively online, to shop at more than 7 million U.S. merchant locations that accept Discover. That could boost Discover’s annual earnings by 6 cents a share to as much as 23 cents, according to Donald Fandetti, a Citigroup Inc. analyst.
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