Discover Financial profit slips but loan growth is strong

C042CA54-F63F-45B2-B66D-6BD36753F278Discover Financial Services, the credit card issuer, beat analysts’ expectations with strong loan growth in the first quarter even though its profit slipped slightly.

The Riverwoods, IL-based company earned $618 million in the first quarter, or $1.31 per diluted share, a 6 percent drop from $659 million, or $1.33 per diluted share, in the same quarter last year. Analysts surveyed by Bloomberg estimated $1.25 per share.

The company’s net interest income increased 11 percent to $153 million, on robust loan growth and a higher net interest margin. Total loans grew 6 percent in the first quarter, with credit card loans and student loans each rising 5 percent and personal loans jumping 27 percent.

In Tuesday’s conference call, David Nelms, chairman and CEO of Discover, stressed the quality of the loans driving new loan growth. “We are not sacrificing quality to achieve growth as credit in our card business continues to remain exceptionally strong,” Nelms said.

“An $18 million, one-time reserve build for a change in reward redemption estimates was the primary driver of the revenue shortfall and secondarily lower mortgage origination volumes than we expected,” said Robert Napoli, principal and equity research analyst with William Blair and Company LLC.

Meanwhile, Discover set aside $272 million as provisions for loan losses, an increase of 71 percent, or $113 million, compared with the first quarter in 2013.

“The provision for losses was not unusually large and they exceeded expectations with that provision,” Napoli said. Rating the company’s stock as outperform, Napoli wrote in his research note that the company is expanding market share through its loan products and maintains “impressive” credit quality.

About 85 percent of Discover’s total interest income comes from what it earns on revolving balances on its credit cards, according to the company’s annual report.

As the credit environment gets better, big credit card companies have been able to make more money. American Express Co., the biggest card issuer by customer spending, reported a 12 percent increase in net income Wednesday as card purchases climbed and expenses fell. The McLean, Virginia-based Capital One Financial Corp. saw first-quarter profit rise 9.3 percent to $1.15 billion.

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