Discover Misses Earnings Expectations as Profit Falls 11% -- Update

By AnnaMaria Andriotis 

Discover Financial Services reported second-quarter earnings after the market close Wednesday that fell short of analysts' expectations largely due to the company setting aside more funds to cover future loan losses.

Profit for the quarter fell 11% to $546 million, or $1.40 a share, from $616 million, or $1.47 a share a year earlier. Analysts polled by Thomson Reuters expected profit of $551 million and earnings of $1.45 a share.

Discover shares fell 3.8% in after-hours trading.

The card company is the latest in the industry to increase loan-loss provisions substantially and to raise its expectations for losses. Discover Chief Executive David Nelms kicked off his opening remarks on the firm's earnings call by saying that for the first time since 2009, industrywide card charge-off rates have registered a "sustained rise." Mr. Nelms and finance chief R. Mark Graf said factors driving this included a mix of an increasing supply of credit, consumers again taking out more debt and new accounts working their way to peak losses.

Provisions for loan losses increased 55% from a year earlier to $640 million.

Discover reported a total net charge-off rate, which reflects losses on credit cards, personal and student loans, of 2.71% for the second quarter, up 0.53 percentage point from a year ago.

Discover revised its 2017 guidance for charge-offs to a range of 2.7% to 2.8%. In the first quarter, management projected a 0.3- to 0.35-percentage-point increase in the credit-loss rate for the full year with an implied credit-loss rate between 2.55%-2.60%

Net charge-offs for credit cards increased to 2.94% in the second quarter from 2.84% in the first quarter and 2.39% a year ago.

Mr. Nelms and Mr. Graf said a rising supply of personal loans outside their company is having knock-on effects on its charge-offs. The executives said that as more consumers sign up for personal loans from relatively new lenders, they are taking on more debt than they might be able to handle. This, the executives said, resulted in rising losses with the accounts that they have with other lenders, including Discover.

Mr. Nelms said the company is tweaking some of its models, including its decision-making in terms of the customers who qualify for credit-line increases and the consumers targeted by the firm's marketing. The company also expects a slowdown in growth of its personal loans.

Operating expenses remained fairly steady at $912 million, rising 1% from a year earlier.

The company's revenue net of interest expense came in at $2.42 billion, slightly above analysts' expectations and up 9% from a year ago. That was driven by higher net interest income, helped by rising interest rates and growing balances. The company's credit-card yield increased 0.24 percentage point from a year ago due to the rising prime rate.

Write to AnnaMaria Andriotis at [e-mail]

(END) Dow Jones Newswires

July 26, 2017 19:59 ET (23:59 GMT)

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