Discover 3Q profit more than doubles, card use up

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NEW YORK (AP) — Discover Financial Services on Thursday said its fiscal third-quarter profit more than doubled, as its customers used their cards more and late payments reached a new low.

The results beat Wall Street expectations, and its shares rose 79 cents, or 3.1 percent, to $26.13 in morning trading.

The Riverwoods, Ill.-based credit card issuer reported net income attributable to common shareholders soared to $642 million, or $1.18 per share, in the three months ended Aug. 31. That was up from $258 million, or 47 cents per share, in the year-ago quarter.

Revenue rose 5 percent to $1.79 billion from $1.71 billion last year.

Analysts, on average, were expecting profit of 96 cents per share, on revenue of $1.77 billion, according to a survey by FactSet.

Higher gas prices helped push sales volume on Discover cards up 9 percent to $26.3 billion for the quarter. The average price per gallon during the June to August period was $3.648 per gallon, up from $2.729 the prior year, according to auto club AAA, Wright Express and Oil Price Information Service.

The company does not reveal the number of cards its customers hold, but said new customers also contributed to the growth.

The volume of purchases its networks processed, including Discover, Pulse and Diners Club International, rose 13 percent to $71.89 billion. Revenue from transaction processing rose 10 percent to $44 billion.

The balances customers carried on cards rose 2 percent, the first such increase since the spring of 2009. Yet the company says it also sees more customers paying their balances off each month.

Discover also sharply cut its provision for loan losses, or the money it set aside to cover unpaid balances, to $100 million, from $713 million last year.

It was able to do so because late payments fell to an all-time low, dropping to 2.43 percent of balances on an annualized basis. That’s down from 4.39 percent in the third quarter of 2010, and less than half the all-time high delinquency rate of 5.6 percent in the fourth quarter of 2009.

The rate of defaults, or charge-offs, also dropped by half, to $440 million, or 3.85 percent of balances, from $875 million, or 7.73 percent of balances, a year ago.

As a result the improved payment behavior, Discover released $365 million from its reserves set aside to cover bad loans.

The reserve release helped drive the numbers higher, but Sterne, Agee analyst Henry Coffey said investors should focus on the increased spending and higher balances customers are carrying. “That’s what drives the business forward,” he said, adding that Discover turned in “an amazing quarter.”.

Discover also got a boost from increased interest payments related to its growing student loan business. It added $3.1 billion in student loans through acquisition during the period. That was partially offset by the sale of $1.5 billion in federal student loans, a part of the business that Discover is exiting.

Discover last year bought The Student Loan Corp. from Citigroup Inc., and has targeted the private student loan market as a growth area.