Growth in loans, decline in loan-loss reserves boost Discover Financial’s 4Q profit

LOS ANGELES, Calif. – Discover Financial Services’ net income jumped 11 per cent in the last three months of 2013, as users of its namesake credit card and other loan services stepped up borrowing and the company set aside less money to cover potential loan losses.

The company said Thursday that total loans grew 5 per cent in the quarter versus the same period a year earlier. Credit card loans grew 4 per cent. Discover card sales volume rose 3 per cent during the October-December period, when customers traditionally ramp up spending for the holidays.

All told, Discover’s fourth-quarter net interest income, or money earned from loans after factoring in interest expense, jumped nearly 10 per cent to $1.57 billion from $1.43 billion.

In a conference call with Wall Street analysts, Discover Chairman and CEO David Nelms said he anticipates a loan growth will be in the low-single-digit range for the industry this year, noting Discover’s loan growth has come from taking share from rivals.

“Our strategy is to continue to grow faster than the industry,” Nelms said.

Discover has been working to expand its credit card business, while also pushing further into the payments processing business and direct banking, offering personal, student and home equity loans.

In the company’s payments services business, which competes with Visa and MasterCard, revenue dropped 2 per cent as transaction processing revenue declined. Dollar volume for the company’s payments business slipped 1 per cent.

The latest quarter included a provision for potential loan losses of $354 million, down from $370 million a year earlier.

All told, Discover said that its profit after paying preferred dividends was $588 million, or $1.23 per share, in the three months ended Nov. 30. That compares with $530 million, or $1.06 per share, a year earlier.

Revenue net of interest expense grew about 6 per cent to $2.13 billion, up from $2.02 billion.

Analysts polled by FactSet expected earnings of $1.17 per share on $2.1 billion in revenue.

Discover’s board declared a quarterly cash dividend of 20 cents to be paid Feb. 20 to shareholders of record as of Feb. 6. The company also will pay a quarterly cash dividend of $16.25 to certain preferred shareholders. That dividend will be paid on March 3 to shareholders of record on Feb. 14.

Shares of Riverwoods, Ill.-based Discover ended regular trading down $1.26, or 2.4 per cent, at $52.40. The stock added $1.10, or 2 per cent, to $53.50 in extended trading.