Discover Financial Services said it has benefited from making fewer bad loans but said much of its growth may actually come from products other than credit.
"Moving to the front of consumers' wallets, that has always been a challenge" for Discover, said Michael P. Taiano, a credit card industry analyst at Sandler O'Neill & Partners. "And I think it will continue to be a challenge, although they have made some progress."
Discover's core customers aren't the same "big spenders" that American Express Co. has, Taiano said. "But I think they are defining themselves as a broader consumer lender and expanding into some other types of loan products."
The company's direct banking strategy could be a boon for potential future business, David Nelms, Discover's chief executive and chairman, said.
"The way we look at it is, credit cards are part of direct banking," Nelms said in an interview. "We think that the combination of technology and consumer demand — those two things coming together — can cause a lot more growth across lots of banking products, including student loans."
In January, Discover bought Student Loan Corp. from Citigroup Inc. for $600 million.
Nelms said he expects to add other direct banking products to Discover's roster, such as mortgages and direct checking accounts, over the next few years.
"Branches are very expensive," Nelms said. "If you are a company like us, we can offer a better deal for the consumer."
The Riverwoods, Ill., company said it beat Wall Street's expectations with growth driven by improvements in credit performance and an increase in card sales. Discover reported a profit of $465 million in its fiscal first quarter, compared with a net loss of $104 million a year earlier.
"If you look at the sequential improvement" in credit performance, "it doesn't show any sense of slowing down yet, but clearly it will start slowing," Nelms said in a call with analysts.
"I would expect that over the coming quarters, it will start to moderate and will start to approach whatever the trough is," Nelms said.
Discover earned 84 cents per diluted share in the quarter ending Feb. 28, up from a loss of 22 cents per diluted share a year earlier. Analysts' predictions averaged 51 cents a share.
Nelms said that he expects Discover might potentially benefit from upcoming rule changes in network routing caused by the Durbin amendment.
Retail bank executives have said in discussions with Nelms that regardless of the outcome of the legislation, they plan to put more than debit signature networks on the cards they issue, Nelms said.
"They are going to have someone like Pulse to provide competition," Nelms said in the interview. "A lot of the banks that we talk to may want to split their volume, just to show how competitive the industry is."
Discover also is working on mobile payments as a part of the Isis system, with the mobile carriers AT&T Inc., Verizon Wireless and T-Mobile USA.
But at Discover's annual Investor Day Wednesday, executives had few new details to provide on this venture.
"All they are saying now is there is a potential growth opportunity," Taiano said. "It's something they are planning on investing in. They haven't made it out to be this great earnings driver for the company in the next couple of years."
Net revenue for the quarter was $1.7 billion, up 2.5% from a year earlier. Discover's stock price closed Wednesday up 5.44% at $23.46.