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Buoyed by a hefty lawsuit-settlement payment and a sharp decline in expenses, Discover Financial Services today reported net income of $577.5 million for its fiscal third quarter ended Aug. 31, up 221% from $180.1 million during the same quarter last year. Revenue net of interest expense was $1.8 billion, up 38.5% from $1.3 billion. Discover received $472 million during the quarter as part of $2.75 billion in a combined settlement it reached last year with Visa Inc. and MasterCard Worldwide. Discover claimed in a 2004 lawsuit that the card networks' exclusionary rules hampered its growth. Discover's U.S. card unit posted a 16.1% decline in sales volume during the quarter, to $24 billion from $28.6 billion, caused by lower gas prices and a general decline in consumer spending, Discover said. Citing lower cardholder payments and reduced balance-transfer activity and sales volume, Discover says managed loans were $51 billion, up 0.1% from $50.5 billion. Discover's managed net charge-off rate on credit card receivables rose to 8.39%, up 319 basis points from 5.2% during the same period a year earlier, caused by higher consumer bankruptcies and unemployment rates, Discover said, anticipating the rate to range between 8.5% and 9% during the fourth quarter. The delinquency rates on loans at least 30 days past due was 5.1%, up 125 basis points over 3.85% a year ago. The company's provision for loan losses rose 277%, to $924.4 million from $245.2 million. Total third-party payments segment volume was $36 billion, up 2% from $35.3 billion. Volume for Discover's Pulse PIN-debit network decreased 1.1%, to $28.1 billion from $28.4 billion, while volume from third-party Discover card issuers fell 17.6%, to $1.4 billion from $1.7 billion. Total transactions processed on the Pulse network rose 5.5%, to 753.2 million from 713.8 million. Diners Club International volume increased 23.1%, to $6.4 billion from $5.2 billion during the same period a year ago, when results included only two months of Diners Club volume. Discover also slashed total company expenses by 14.8%, to $523.8 million from $612.5 million during the quarter through layoffs and general cost-cutting. During a conference call today with analysts, Discover Chairman and CEO David Nelms said the company has sharply tightened its underwriting standards for new customers. "We are seeing the best response rates (to new credit card solicitations) than what we have seen in years, but given the economic environment, we are being very careful to pick through them and only approve customers we are sure will stay current (on their payments) with us." Nelms expects charge-offs and delinquencies to continue to rise, noting "I don't think we've seen the peak yet."
