Discover Tries To Get Back on Track

  Visa, MasterCard and American Express grew in 2003 but Discover Financial Services took its share of lumps. It watched profits dwindle as it tried to compete in a market place where ultra-low interest rates were the norm. And it saw losses climb as record levels of bankruptcy filings and unemployment took a toll on the credit quality of its portfolio.
  Morgan Stanley's Credit Services, the issuer of the Discover card, reported net income of $688 million for the fiscal year ended Nov. 30, down 9% from 2002's record earnings of $760 million.
  Because of the intensely competitive environment, Discover grew receivables "primarily through balance transfers at low go-to rates," Stephen Crawford, chief financial officer and executive vice president for Morgan Stanley, said in a Dec. 18 conference call discussing 2003 earnings. That proved to be a drag on earnings, he said.
  What's more, a higher provision for loan losses more than offset an increase in net interest income and lower marketing and business development costs. Discover increased its loan-loss reserves by $70 million for the year, including $10 million in the fourth quarter.
  The chargeoff rate on a managed-loan basis increased 41 basis points to 6.6% of receivables from 6.19% in 2002. And though the chargeoff rate for the fourth quarter was 6.87%, down from a peak of 6.9% in the third quarter, "we're obviously still above where we want it to be," Crawford said.
  The over-30-day delinquency rate rose 1 basis point to 5.97% and 90-day delinquencies 16 basis points to 2.82%.
  Because of concerns about growing losses, Discover "over the past year or so made a conscious decision not to grow receivables, and (instead) focus all our energy on improving the portfolio's credit quality," Crawford said.
  At year-end, Discover had managed loans of $48.4 billion, down 5% from $51.1 billion in fiscal 2002. The number of accounts dropped 1% to 46.1 million from 46.5 million in 2002. Transaction volume increased 1% to a record $97.9 billion from $97.3 billion in 2002.
  Crawford said there are "some objective reasons to believe chargeoff dollars may be coming down for us." He notes that delinquency rates, which are normally up between the third and fourth quarters, improved in sequential quarters. In addition, Discover's bankruptcy receipts declined by 8% from the third quarter, he said.
  While working to improve credit quality, Discover also took steps to expand its merchant and cash-access locations, signing 600,000 for the year for a total of 4 million. Discover "plans to increase this significantly in 2004," Crawford says.
  Discover also recruited a number of merchants to participate in its Cashback Bonus Plus Program that gives cardholders the chance to earn rewards of up to 10% of charge volume. Discover launched the program in November with the first in a series of cards-the Gasoline Cashback Bonus Plus Card, which gives holders a rebate of up to 5% on gas purchases and 1% on other purchases. Holders can earn rewards valued at up to 10% by exchanging award certificates through Discover's 25-plus partners. The rewards are funded by Discover and its various partners. Partners include American Airlines, Hyatt Hotels & Resorts, and some retailers.
  Earlier in the year, Discover introduced an airline miles card that lets holders earn one mile for every dollar charged. At 10,000 miles, the holder can get a $100 airline travel credit; 25,000 miles can be redeemed on any major airline for a round-trip coach ticket in the 48 contiguous states.
  As credit quality improves, Discover will once more focus on growth, Crawford said. Already, there are encouraging signs. Discover had record earnings of $365 million for 2004's first fiscal quarter.