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 robin.sidel@wsj.com
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