Credit Commentary

Discover Financial Q4’09 Profit drops

By Zarana on Monday, December 21 2009

Discover Financial Services Inc.'s (DFS) fiscal fourth quarter net earnings were down 14% from a year ago as losses stemming from credit card loans remain high. The company expects losses from souring card accounts to remain at elevated levels the next quarter.

The fourth quarter lower net income available to common shareholders of $352.05 million, compared to a net income of $432.34 million in the corresponding quarter a year ago.

Segment wise, pretax income from U.S. Card dropped to $575 million in the fourth quarter, compared to $646 million for the fourth quarter of 2008. Pretax income from third-party payments increased to $23.77 million from $20.55 million, reflecting an increase in transactions on the PULSE network, lower incentive payments, and higher fee revenues.

The company had a lower after-tax income related to the Visa/MasterCard antitrust litigation settlement of $285 million in the fourth quarter of 2009, compared to $535 million in the prior-year quarter. These were included in continuing after-tax earnings in both the quarters.

Managed net charge-off rate for the fourth quarter rose to 8.43%, up from 8.39% in the third quarter and 5.48% a year ago. Over 30 days delinquency rate for the quarter climbed to 5.31% from 5.10% in the third quarter and 4.56% a year earlier. The increase in net charge-off rate and delinquency rate was attributed to higher levels of consumer bankruptcies and unemployment. The company now expects managed net charge-off rate between 8.4% and 8.9% for the first quarter of 2010.

Allowance for loan losses, at $989 million, increased $383 million (7%) from the prior year but decreased $75 million (11%) from the prior quarter due to a lower reserve build which was offset by high card defaults.

Discover Card sales volume declined 1% from the prior-year quarter to $21.9 billion, reflecting lower gas prices and a general decline in consumer spending, whereas Third-Party Payments volume was $33 billion, down 2% from the previous-year quarter.

Earlier this year, Discover received $1.2 billion from the federal government under the Troubled Asset Relief Program.

Discover was one of hundreds of financial companies to get government assistance during the financial crisis, receiving $1.2 billion in federal bailout funds. Unlike many large financial companies, though, Discover has yet to pay back the government.