Discover loses value in Britain
Riverwoods-based Discover Financial Services, the credit-card company spun off by Morgan Stanley five months ago, said Monday it would take a large fourth-quarter charge related to its Goldfish credit-card business in Britain, where consumer credit has deteriorated.
The noncash write-off covers substantially all of Goldfish's goodwill and other intangible assets, which totaled $422 million as of Aug. 31, Discover said. It is the equivalent of about a half-year of earnings.
Goldfish's card business includes MasterCard and Visa.
"Continued disruption in the UK financial markets, higher interest rates and our decision to reduce our loan exposure to the UK market have negatively affected the book value of our Goldfish business," Chief Executive David Nelms said in a statement.
Analysts, on average, had expected fourth-quarter profit of 35 cents per share, Reuters Estimates said.
Discover also announced a $1 billion stock buyback, equal to about 12 percent of shares. The company's fourth quarter ended Friday.
"The stock buyback is considerably more positive than the goodwill impairment is a negative," Lehman Brothers Inc. analyst Bruce Harting wrote. Yet he said "some investors were looking for a more dramatic move with regard to the UK business, such as shutting down originations or selling the portfolio."
Morgan Stanley had acquired Goldfish from Lloyds TSB Group PLC for $1.68 billion in February 2006.
Like many rivals, Discover has struggled in Britain with mounting consumer credit losses, although it has said bankruptcy filings have moderated.
"While management believes they are taking significant actions to improve returns on capital in the UK business, we believe investors are somewhat skeptical," Credit Suisse analyst Moshe Orenbuch wrote.
He rates Discover "market weight," while Harting rates it "equal weight."
International losses have through Friday contributed to a 39 percent share price decline at Discover since its spinoff from Morgan Stanley at $28.50 per share at the end of June. In comparison, shares of American Express Co. fell just 4 percent over that time.
Discover's international card business suffered a $67 million pretax loss in the third quarter. Overall profit was $202.2 million, or 42 cents per share.
Nelms also estimated the rate of U.S. card charge-offs will be below 4 percent in the fourth quarter. Orenbuch said management previously forecast 4.25 percent to 4.75 percent.