Despite a lagging economy, Discover Financial Services’ jack-of-all-trades strategy seems to be paying off.
The company posted strong gains in the fiscal fourth quarter ended Nov. 30 as it continued to grow its total loans and expand its presence in private student lending.
“There are a lot of different areas of growth for them, and that’s a very unique aspect of their business model,” says Sanjay Sakhrani, an analyst with Keefe Bruyette & Woods.
Besides its credit card and network businesses, the company has been building up its private student-loan and mortgage-origination units over the past year through several acquisitions. That buying spree may be over, but the company will continue to keep a watch out for new deals, David Nelms, the company’s chairman and chief executive, said on a Dec. 15 call with analysts.
“We would continue to look for opportunities given our capital position and our desire to build out, … but I would also say we would continue to be very careful on that,” he said. “I would not say that any acquisition is even required to continue fulfilling our objective, but if the right thing is available at the right price and terms, and it fits our strategy, then of course we’d be interested.”
On the card side, Nelms noted that its continued success in growing sales and receivables reflects greater effectiveness in marketing programs, cash-rewards leadership and expanded merchant acceptance, “all of which contribute to increases in profitable growth.”
As an example, he cited a recently announced program with Amazon.com in which Discover Card members can pay directly at the site with their Cashback Bonuses and earn double rewards on their purchases until the end of the year (
“Since Discover launched the program in October, we have seen a significant increase in cardmember purchases at Amazon,” Nelms said.
Nelms also noted that Discover should know more next quarter how issuers devise their branding strategies to comply with new Federal Reserve Board rules requiring more than one company’s debit brands on cards. Discover owns the Pulse PIN-debit brand, and network-exclusivity deals issuers had struck with Visa Inc. and MasterCard Worldwide have affected Pulse volumes.
“We didn't have as much opportunity for big wins in the last half of this year as people waited to see what the new rules were going to be,” Nelms said. Most of the rule banning network exclusivity takes effect for issuers in April.
Overall, revenue net of interest expense for the quarter was $1.8 billion, up 12.5% from $1.6 billion a year earlier. Net income was up 46.6%, to $513 million from $350 million.
Discounts and interchange revenue totaled $489 million, up 7.9% from $453 million. Transaction-processing revenue rose 20%, to $48 million from $40 million.
Card loans at the end of November totaled $46.6 billion, up 3.1% from $45.2 billion a year earlier. Average loans during the quarter were up 2.5%, to $45.8 billion from $44.7 billion.
The net principal charge-off rate on card loans for the quarter was 3.24%, down 371 basis points from 6.95% a year earlier. The delinquency rate on loans 30 days or more past due was 2.39%, down 167 basis points from 4.06%.
Loans delinquent more than 30 days totaled $1.1 billion, down 38.9% from $1.8 billion. The rate for loans 90 days or more past due was 1.2%, down 92 basis points from 2.12%. Loans delinquent more than 90 days totaled $560 million, down 41.5% from $958 million.
The allowance for card-loan losses at the end of November totaled $2.1 billion, down 34.4% from $3.2 billion a year earlier.
Total Discover card volume during the quarter rose 7.2%, to $26.9 billion from $25.1 billion. Discover Card sales volume rose 7.8%, to $25 billion from $23.2 billion.
Pulse-network sales volume rose 8.3%, to $33.9 billion from $31.3 billion. Sales volume among third-party issuers totaled $1.9 billion, up 5.6% from $1.8 billion. Diner Club International volume (reported by licensees of branded cards issued outside North America) was $7.5 billion, up 2.7% from $7.3 billion.
Proprietary Discover Network volume rose 7.5%, to $25.9 billion from $24.1 billion.
Jeffrey Green also contributed to this story.
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