Discover Financial's Profit Falls 7.1% as Expenses Rise -- Update

By Robin Sidel 

Discover Financial Services said its profit fell in the first quarter from year-ago levels as expenses rose and the company set aside more money to cover future potential losses in its growing loan portfolio.

For the latest quarter, Discover reported a profit of $586 million, down 7.1% from $631 million in the year-earlier period. Shares fell 3% in after-hours trading.

On a per-share basis, earnings were $1.28 a share, down from $1.31 a share. Revenue net of interest expenses grew to $2.17 billion, from $2.08 billion a year ago.

Analysts polled by Thomson Reuters had projected earnings of $1.27 a share on revenue of $2.17 billion.

On a conference call with industry analysts, Chief Financial Officer Mark Graf described a "benign" environment for the company in which delinquencies and defaults remain low. Still, lenders are required to follow a formula that provides a cushion if loans sour in the future.

Total loans grew 5.9% from the prior-year period to $67.6 billion, while credit-card loans rose 5.1% to $53.5 billion. The Riverwoods, Ill., company, which has been diversifying into other types of loans, also reported growth in personal loans and student loans.

Transaction volume on Discover's payments network fell 1% to $50.2 billion. Like American Express Co., Discover both issues credit cards and operates a payments network.

Expenses increased 13% to $93 million, partly attributed to increased costs associated with anti-money-laundering and related compliance programs. Discover said last year that it would put in place a new anti-money-laundering compliance program after the Federal Deposit Insurance Corp. notified the company of possible deficiencies in its program. The company's return on equity was 21%.

Chief Executive David Nelms said the company is moving forward to issue more secure cards that are embedded with a computer chip. "I suspect this is going to be somewhat of a rocky rollout for the industry," he said, noting that consumers will have to adapt to inserting the card into a payment terminal rather than swiping it.

Mr. Nelms also said Discover will keep adding new features to its main card called "It," such as a recent one that allows cardholders to freeze their accounts if they misplace their card. The freeze feature can be lifted if the card is found.

Discover also is introducing a travel rewards card that is aimed at prime credit customers who hold a monthly balance on their accounts.

Mr. Nelms said that Discover still isn't seeing any boost in spending from consumers who are saving money at the gas pump. Instead, those consumers appear to be saving the extra money that comes from lower gas prices.

Angela Chen contributed to this article.

Write to Robin Sidel at [e-mail]

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