Discover profit falls in difficult market

NEW YORK -- Discover Financial Services' profit fell 16 percent in the third quarter, its first quarter as an independent company, as the credit card issuer struggled with a difficult U.K. market and absorbed loan loss provisions.

Higher costs related to marketing and development and its June 30 spin off from Morgan Stanley also dampened results.

Discover's shares fell 54 cents, or 2.43 percent, to $21.72 Tuesday on the New York Stock Exchange, even though the company boasted record volumes of credit card sales and transactions and declared a dividend of 6 cents a share.

Riverwoods-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 rose to $394.1 million from $392.3 million, but other income, which includes securities income, fell to $845.5 million from $889.4 million.

Largely because it had trouble reselling card-backed securities, Discover made loan loss provisions of $211.6 million.

The U.S. card business posted pretax income of $387 million, flat with last year. Its charge-off rate was 3.7 percent, up from a year ago but down from the second quarter, and its 30-plus-day delinquency rate of 3.16 percent was better than last year but slightly worse than the second quarter.

"Last quarter and this quarter, credit quality was so good it'd be hard to keep it this good forever," CEO David Nelms said. "We would expect the modest rise in delinquencies would lead to a modest rise in charge-offs in the fourth quarter."

Discover's U.K. card business, Goldfish, was weak. Its pretax loss widened to $67 million from $30 million last year; its charge-off rate rose to 6.56 percent, and its 30-plus-day delinquency rate climbed to 4.89 percent.