Discover Financial 4Q profit slips as card law lowers interest income
Discover Financial Services fell 9.1 percent, the biggest decline in the Standard & Poor's 500 Index, after the company said new restrictions on credit-card rates hurt fourth-quarter profit.
Earnings from continuing operations for the three months ended Nov. 30 were $371 million, or 63 cents, compared with $444 million, or 92 cents, a year earlier, the Riverwoods-based company said today in a statement.
The lender's net yield on loans fell to 9.37 percent from 9.9 percent in the previous quarter as Discover said it implemented changes mandated by the Credit Card Accountability Responsibility and Disclosure Act, which allows customers to reject rate increases on existing balances. FBR Capital Markets Inc. analyst Scott Valentin said he was surprised by the lower yields as card issuers including Discover raised rates before the law took effect.
"Our biggest concern was that credit-card yields came down," Valentin said in an interview. "Relative to expectations, it was a little disappointing."
Discover fell $1.50 to $14.92 at 4:02 p.m. in New York Stock Exchange composite trading, the biggest decline in five months. It dropped to as low as $14.76 earlier today.
"The initial phases of the CARD Act have already started going in, so we're starting to feel some of those effects," Chief Executive Officer David Nelms, 48, said in an interview. "If people made late payments, their interest rate could have risen, and the CARD Act does not allow that anymore except in certain circumstances."
Legal Settlement
Results for the quarter were buoyed by a $285 million gain from the final installment of a legal settlement with Visa Inc. and MasterCard Inc. Discover agreed in October 2008 to accept $2.75 billion to resolve the antitrust case it brought against the world's largest electronic-payment networks.
Managed credit-card write-offs in the quarter climbed to 8.43 percent from 5.48 percent in the same period last year. The rate was below Nelms's previous forecast of 8.5 percent to 9 percent. The company said it expects annualized write-offs of 8.4 percent to 8.9 percent in the current quarter.
Nelms said he isn't ready to call a peak in credit-card defaults.
Credit-card defaults tend to track the U.S. unemployment rate, which topped 10 percent in the quarter, making it harder for customers to keep up with payments.
More Americans than analysts expected filed first-time claims for unemployment benefits last week in a sign the job market may take time to strengthen and weigh on the economic recovery. Initial jobless claims rose by 7,000 to 480,000 in the week ended Dec. 12, from a revised 473,000, the Labor Department said today.