Discover Financial to Tap Home-Equity Market

   By Andrew R. Johnson 
 

The improving housing market has opened the door to a new line of banking business for credit-card lender Discover Financial Services (DFS)--home-equity loans.

The company, best known for its orange logo and cash-back credit cards, plans to offer home-equity loans starting in the second half of the year as it aims to benefit from rising home values and continue its push beyond plastic.

Discover, which says about 80% of its customers are homeowners, plans to offer fixed-rate, closed-end loans worth $25,000 to $100,000, marketing initially to existing customers and eventually expanding more broadly to other consumers.

Many banks in recent months have reported gradual increases in home-equity lending, spurred by rising home values that have left consumers with more equity to tap.

Such lending took a dive when the housing market crashed a few years ago, wiping out the equity that borrowers had in their loans as values plummeted. Several lenders retrenched from the market and capped borrowers' ability to draw additional funds under existing home-equity loans.

"My view is that in many places in the country, the housing market is finally stabilizing," David Nelms, chairman and chief executive of Discover, told investors and analysts Tuesday during the company's annual financial meeting in New York. "I think that there are people who do have equity in their homes, and it's a much more careful time today than it was during the" 2005-2007 housing market.

Home-equity loans would build on Discover's existing foray into mortgage lending as it works to diversify beyond credit cards, which generate the bulk of its revenue, and put excess capital to work.

Last year, Discover launched a home-loan business that originates mortgages online, using assets it acquired from Tree.com Inc. (TREE). To date, that business has originated more than $2 billion mortgages, though it sells those loans rather than retaining them on its balance sheet.

Discover executives said Tuesday they are open to making additional acquisitions if they fit strategically with the company. It also sees opportunities to return more capital to shareholders.

"Looking forward we see room to increase our dividends and anticipate share repurchases will continue to be an integral part" of the company's capital strategy, Chief Financial Officer Mark Graf said during a presentation. Last year Discover returned $1.4 billion to shareholders through dividends and share buybacks.

Home-equity loans could complement personal loans that Discover markets to consumers as a debt-consolidation tool.

Discover caps those loans at $25,000, so home-equity loans could address customers who are seeking larger amounts, Mr. Nelms said.

Discover also offers private student loans as well as savings accounts, CDs and checking accounts, which it recently rolled out to select customers and plans to market to non-customers next year. By far, credit cards remain the company's largest category, totaling $51.1 billion last year compared with $7.8 billion of student loans and $3.3 billion of personal loans.

Discover is one of the few credit-card lenders experiencing consistent loan growth, which it says is due to share gains over its competitors. The company on Tuesday forecast long-term card-loan growth of 2% to 5%, up from a previous forecast of 2% to 4%.

Mr. Nelms said the rollout of mortgages last year and checking accounts this year represent the last additions he feels are necessary as Discover positions itself as a full-fledged bank that can compete with larger financial institutions for customers.

"Now that we have those . . . all of the other potential products are more nice-to-haves," Mr. Nelms said in an interview.

Auto loans, store credit cards and brokerage accounts are products Discover could offer in the future, "but it's more a matter of . . . what makes the most sense to do as an extension," Mr. Nelms said.

Mr. Nelms noted Discover had a direct-to-consumer brokerage business previously while it was part of Morgan Stanley (MS). Discover was spun off of Morgan Stanley in 2007.

"It's something we're obviously pretty familiar with," Mr. Nelms said, adding it's unlikely Discover would offer such products in the near future.

Discover's shares were up 1% at $42.26 in recent trading. The shares are up more than 9% this year.

Write to Andrew R. Johnson at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires