Discover's Earnings Fall on Rising Expectations for Losses

Discover Financial Services' (DFS) earnings shrunk in the first quarter as expenses rose and the company set aside more cash for loan losses.

The credit card issuer reported net income of $631 million, a 7% decrease from a year earlier. Earnings per share were $1.31, which beat the $1.25 consensus estimate from analysts, but fell two cents short of the year-earlier period.

The Riverwoods, Ill.-based company's earnings report had some bright spots — loans grew by 6%, revenue improved by 4%, and net interest income grew by 11%.

But Discover's quarterly results were hampered by a 71% year-over-year increase in provision for loan losses, to $272 million. That came despite the fact that the company's total chargeoff rate fell.

Discover's quarterly bottom line was also hurt by a 4%, or $31 million, increase in operating expenses, which was driven in part by new hiring.

"Our results this quarter reflect a solid start for 2014 as we delivered strong card loan growth that was near the top of our targeted range while maintaining excellent credit performance and continuing to grow other lending products as well," Chief Executive David Nelms said in a news release Tuesday.

In addition to issuing credit cards, Discover operates the payments network that its cards use. The company also makes personal loans and private student loans, and it operates a bank that offers checking and savings accounts to consumers.

Discover's various business lines showed mixed results.

On the positive side of the ledger, credit card loans grew by 5%, and the percentage of credit card loans that are more than 30 days past due showed a small improvement.

Less encouraging was a significant uptick in the percentage of private student loans that got charged off. That percentage rose from 0.82% a year earlier to 1.31% in the first quarter of this year. Discover attributed the increase to a larger portion of borrowers entering the repayment period on their student loans.

Discover's payment services business also experienced further erosion in the first quarter. Revenues fell and expenses rose, resulting in pretax income of $28 million, down $19 million from a year earlier.

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