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Discover Financial Services is continuing its push to ensure that future profitability is less dependent on plastic with its planned $600 million student loan acquisition.
September 17
Discover Financial Services highlighted just about everything, but credit cards in its fiscal third-quarter earnings report.
The Riverwoods, Ill., company said Monday that its cardholders were defaulting less and spending more, but it had much more to say about the potential for "organic growth" in its newly acquired student loan platform. Discover is also considering providing direct mortgage and checking accounts in an effort to bolster its banking operations.
"You know there are a lot of companies that will take a short-term hit on their financials. The great thing about the moves that we made is that we make immediate short-term returns and boost our long-term growth prospects," David W. Nelms, Discover's chairman and chief executive, said in an interview Monday. "If you look at how we've come out during this downturn, and how well we've performed, I think it's not been overconfidence. I think we delivered what we said we would."
Nelms said he expects that demand for student loans will grow faster than for credit cards over the next five years as the cost of education continues to rise, and government-backed loans become harder to get.
Discover announced Friday that it had agreed to buy Student Loan Corp. for $600 million. The deal dominated the call, though the pending acquisition had no impact on the company's third-quarter results. Student Loan Corp. is majority owned by Citigroup Inc.
Carlos Minetti, Discover's head of consumer banking and operations, said the move would significantly expand its student lending operations, and over time would deliver the opportunity to hook new customers when they're young, despite credit card regulations that make it much harder to offer credit cards to young people.
"It does afford us the opportunity to cross-sell to them over the life cycle," he said during a conference call Monday to discuss Discover's results for the quarter that ended Aug. 31. "At some point they are going to want different products. They are going to want a credit card."
Analysts still had concerns.
"I'm always wary of companies that buy businesses that are outside their core competencies," said Michael P. Taiano, a credit card industry analyst at Sandler O'Neill & Partners. "But my take would be positive. They want to be in that business. "
John Stilmar, an analyst with SunTrust Robinson Humphrey, wrote in a research note Monday that he remains "cautious" about the specific catalysts that will sustain Discover and other issuers.
"We enter [the third quarter] less focused on the [earnings per share] results and more attuned to the recent contraction in spending in the card business," he wrote.
After the closing of Discover's latest deal, student loans alone will be over 10% of unsecured loans, Nelms said.
Discover, of course, couldn't get away with not speaking about its credit card business. Spending volume increased 5% from the same period a year earlier, to $24 billion. The net chargeoff rate improved to 7.18%, down 122 basis points.
Discover reported net income of $260.6 million, or 47 cents per share, down sharply from $577.4 million, or $1.07 cents per share, a year earlier.
As for Discover's future, Nelms said he envisions his payment processor as being one of a few with a national direct banking footprint.
"The thing to recognize is that credit cards themselves are direct banking, and I think that other parts of banking are moving towards direct banking as well," he said.
