Discover Financial Services 3Q profit fell 16 percent on losses in international cards
NEW YORK -- Discover Financial Services LLC's profit fell 16 percent in the third quarter, its first quarter as an independent company, as the credit card issuer suffered declines in its U.K. business and set aside provisions for loan losses.
Higher marketing and business development expenses and costs related to its June 30 spinoff from Morgan Stanley dampened results as well.
Discover said Tuesday that credit card sales volume rose 4 percent to a record $26.8 billion, and also declared an initial dividend of 6 cents, but it didn't appear to be enough to please investors. Shares fell 64 cents, or 2.8 percent, to $21.62 in morning trading.
Riverwoods, Ill.-based Discover reported net income of $202 million, or 42 cents a share, for the June-August period, down from $241 million in last year's third quarter.
Net interest income was $394.1 million, up from $392.3 million last year. Loan loss provisions were $211.6 million — lower than a year ago, but higher than the second quarter this year. Discover's cash reserves now stand at $8 billion.
Discover's U.S. card business had pre-tax income of $387 million, unchanged from last year's third quarter. The U.S. delinquency rate improved since last year, while its charge-off rate was 3.70 percent — up from a year ago, but down from this year's second quarter.
Discover's international card segment was weaker, in contrast to many other U.S. financial companies whose overseas revenues have offset softness in the United States. The segment posted a pretax loss of $67 million, wider than last year's $30 million loss. Its charge-off rate was 6.56 percent, up from the previous quarter and last year's level, and its 30-plus-day delinquency rate has climbed since last year to 4.89 percent.
Discover's international segment is, for the most part, its U.K. card business Goldfish, which has been struggling through a tough credit environment in Britain.
Meanwhile, the third-party payments segment had pretax income of $9 million, down from $10 million, despite a 17 percent increase in quarterly transaction volume to a record.
The Discover brand, launched in 1986, debuted on the New York Stock Exchange on July 2. Its stock has fallen from a high of $29.15 during its first day to a low of $20.25 earlier this month.
Discover has more than 50 million card holders and operates the Pulse ATM and debit network. It lags Visa, MasterCard and American Express in U.S. market share, and has been working to improve its position by lowering costs for small and mid-size merchants so they will accept its cards.
Last week Discover joined forces with JPMorgan Chase & Co.'s merchant acquiring business, and Monday teamed up with Wells Fargo Merchant Services LLC. It also came to an agreement with Bank of America Merchant Services.
"We've made significant gains in one of our most important strategic initiatives through agreements with merchant acquirers, which will enable us to increase acceptance of Discover Network cards," said David Nelms, Discover's chief executive, in a statement.
One month of Discover's results were also wrapped into Morgan Stanley's earnings report last Wednesday, when the second-biggest U.S. investment bank said third-quarter profit tumbled by a larger-than-anticipated 17 percent as it wrote down nearly $1 billion worth of loans.