Broad-based loan growth drives higher profits at Discover
Growth in credit cards, student loans and personal loans helped power a 9% increase in profits at Discover Financial Services during the first quarter.
The Riverwoods, Ill.-based consumer lender reported net income of $726 million, up from $666 million in the first quarter of 2018.
“Our solid execution on growth initiatives, effective credit risk management and operating efficiency drove strong profitability,” CEO Roger Hochschild said Thursday in a press release.
Loans in the firm’s flagship credit card business totaled $70.8 billion at the end of the first quarter, an 8% increase from a year earlier.
Card loans at Discover have risen by at least 8% in each of the last eight quarters, outpacing industrywide growth.
The first-quarter growth was smaller in personal loans, which increased by 2% to $7.4 billion. Discover began to scale back its originations of personal loans in 2017 and has been issuing periodic warnings about credit quality in the sector.
Private student loans grew by 9% to $8.1 billion during the first quarter, excluding loans that Discover has purchased.
The $110 billion-asset company also benefited from higher margins on its loans. Its interest yield on credit card loans was 13.42%, up from 12.85% in the first quarter of last year, driven partly by increases in the prime rate. Across all business lines, the net interest margin was 10.46%, up from 10.23% a year earlier.
One countervailing factor was higher rewards costs, which the company pays out to credit card users as a way to encourage spending. Rewards costs increased by 14% to $446 million during the first quarter, as customer spending was higher in categories that paid 5% cash rewards.
Operating expenses at Discover rose by 6% to $1.02 billion, driven primarily by higher spending on information processing and employee compensation.
Credit quality was weaker than in the first quarter of 2018. The net charge-off rate for personal loans was 4.53%, up from 4.03% a year earlier.
For credit card loans, the net charge-off rate was 3.50%, up from 3.32% in the first quarter of last year.