Higher yields on card loans boost Discover's 2Q profit

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Solid loan growth and higher yields in the credit card business boosted quarterly earnings at Discover Financial Services.

The Riverwoods, Ill.-based company reported net income of $753 million, which was 13% higher than in the second quarter of 2018. Discover, which reported earnings per share of $2.32, outpaced the expectations of analysts surveyed by FactSet Research Systems by 21 cents.

Loans in the firm’s flagship credit card segment rose by 7% in comparison to the same period a year earlier. That growth rate was high in comparison with some competitors, but it was down a bit for Discover. The company had previously reported card loan growth of at least 8% in eight consecutive quarters.

CEO Roger Hochschild said in an interview that Discover has been tightening its credit standards to some degree. “Even though the economy is very good, it’s still late cycle,” he noted.

Overall, loans increased 6% year over year, with private student loans (3%) and personal loans (2%) pulling down the average.

The company’s results were also aided by improved margins in the credit card business. Its card yield of 13.44% was up 56 basis points from the second quarter of 2018. Discover attributed the improvement to increases in the prime rate and changes to its portfolio mix.

“Growth was primarily from higher yielding merchandise balances versus promotional balances,” Hochschild said during the company’s quarterly earnings call.

The flip side of higher market interest rates was that the company’s cost of funds rose. Interest expenses climbed by 31% to $645 million.

The company’s credit performance continued to weaken, which was consistent with trends across the card industry. But Discover noted Tuesday that the pace of change has been moderating.

Compared with the second quarter of 2018, the percentage of credit card loans that were at least 30 days past due rose by 18 basis points to 2.34%. The percentage of credit card loans that were charged off rose by 15 basis points to 3.49%.

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