Discover’s credit quality weakens, but profits climb on tax savings

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What a difference the 2017 tax law makes.

Discover Financial Services reported a 1.4% decline in pretax earnings during the first quarter. But thanks in large part to a sharply reduced tax bill, the company’s net income rose by 18% from the same period last year to $666 million.

Riverwoods, Ill.-based Discover was hurt in the quarter by eroding credit quality. In its flagship credit card business, the firm reported $540 million in net principal charge-offs, up from $422 million in the same period a year earlier.

The company also stated that $1.53 billion of its credit card loans were more than 30 days past due, a 24% increase from the first quarter of last year.

Discover’s provision for loan losses totaled $751 million, which was up 28% from a year earlier.

The rise in credit costs offset most of Discover’s revenue growth during the quarter. Discover’s net interest income climbed by 11% to $2.1 billion, thanks in large part to 9% loan growth.

In the credit card segment, total loans at the end of the quarter were up 10% from the prior year. Personal loans also grew by 10%, while private student loans increased by 3%.

“Our performance this quarter was characterized by robust loan and revenue growth,” Discover CEO David Nelms said in a press release.

Nelms also noted that the company’s results in first quarter of 2018 reflected the benefits of last year’s tax law for the first time.

The company has said that it expects its effective tax rate to fall to 24% in 2018, down from 34% in the last full year prior to the law’s enactment.

During the first quarter, Discover paid $190 million in taxes, which was down from $304 million a year earlier.

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