Discover's 2Q profit surges despite rise in charge-offs

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A smaller tax bill helped propel Discover Financial Services to a 23% increase in net income during the second quarter.

The Riverwoods, Ill., company on Thursday reported net income of $669 million, which was up from $546 million during the second quarter of last year.

Much of the improvement appeared to be the result of the tax law signed by President Trump in December. Discover’s income before income taxes rose by only $10 million in comparison with same period a year earlier.

In the credit card segment, which accounts for 80% of Discover’s loan portfolio, total loans were up 10% from the second quarter of 2017. Card yield, a measure of the average profit margin on credit card loans, was 12.88%, up from 12.60% one year earlier.

But the strong growth is coming at a cost. The net charge-off rate on Discover’s credit card loans was 3.34%, up from 2.94% in the same period last year. And the companywide provision for loan losses rose by 16% to $742 million.

Losses on credit card loans tend to be highest during their first two years on a bank’s balance sheet. Discover has recorded credit card loan growth of at least 8% in each of the past five quarters, which is larger growth than the card industry as a whole.

Also during the second quarter, Discover’s expenses rose by 7.9% to $984 million, which the company attributed to higher staffing levels, higher average salaries, and higher spending on marketing.

“Our investments in the Discover brand and in growth initiatives across our product set continued to drive outstanding returns this quarter,” Discover CEO David Nelms said in a press release. “The direct impact of these initiatives was evident in our continued strong loan and revenue growth.”

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