Discover Financial Services said Thursday that it has applied to convert to a bank holding company — a step that last month it said it was unlikely to take — and asked the Treasury Department for an infusion under the Capital Purchase Program.
The Riverwoods, Ill., card issuer also said an uncertain economic environment prevented it from forecasting credit performance beyond its first fiscal quarter, which started Dec. 1.
Discover owns a $33 billion-asset bank in Greenwood, Del. "We originally thought that with most of our activities already in the bank, that that was the simplest path," David Nelms, Discover's chief executive, said in an interview Thursday, after the company reported results for the quarter that ended Nov. 30. "But as we looked through all the pros and cons, what we found is that participating at the parent level maximized our liquidity and maximized the level at which we could participate and maximized our strategic flexibility."
Becoming a bank holding company entails "more effort for us" and "some additional regulatory oversight," he said.
Discover would not say how much capital it requested from the Treasury. Mr. Nelms said the money would be "very helpful" in supporting Discover's lending, "given our need and decision to finance our loans on balance sheet, versus securitizing."
About $13.7 billion of Discover debt will mature this fiscal year, including roughly $7.7 billion of deposits. The company plans no securitizations for the period and said it believes its deposit programs can meet its needs.
Roughly $1.3 billion of the $1.6 billion of deposits it added in the fiscal fourth quarter were from its direct-to-consumer platform.
Last month the Federal Reserve Board said it plans to create a $200 billion loan facility to support the issuance of new securities backed by consumer receivables. Mr. Nelms said he was "hopeful" that the program "will be effective," but "we're not going to count on it."
Discover's chargeoff rate increased 28 basis points from the previous quarter and 163 basis points from a year earlier, to 5.5%, in line with the guidance it had affirmed last month. But it raised its projection for its fiscal first quarter from a chargeoff rate approaching 6% to one that will exceed 6%.
During a conference call, Mr. Nelms said that considering "the deterioration in the economy in the last two months … we cannot predict the U.S. economy and the state of the consumer with a great degree of certainty." Hence, "until we get a better sense for unemployment trends, we are not providing estimates for periods later in the year."
Discover swung from a net loss of $56.5 million a year earlier to a $432.3 million profit. The results included a $535 million after-tax gain from the settlement of its antitrust suit against Visa Inc. and MasterCard Inc. A big chunk of that money is subject to a dispute with Morgan Stanley, Discover's former parent.
Discover shares were up about 14% by early Thursday afternoon. Michael Taiano, an analyst at Sandler O'Neill & Partners LP, said the news that Discover had applied for the federal infusion may have been what caused its share price to shoot up. It has a relatively strong capital and liquidity position, "but I think this adds to it even more," Mr. Taiano said.
"In some ways you're putting yourself in a weaker competitive position if you're not taking advantage" of the programs available, Mr. Taiano said. Capital from the Troubled Asset Relief Program, he said, "is relatively cheap. … I don't know that there's a lot of downside given the uncertainty that's out there, even if you feel like you are well capitalized."
These days, he said, "I think a lot of financial companies are just of the view, 'Might as well take it now; we could always return it at a later date.' "
