Credit Commentary

Discover Financial Services Reports Second Quarter Results

By Zarana on Tuesday, June 30 2009

Discover Financial Services (NYSE: DFS) reported second quarter net income of  $226 million or $0.43 per share, driven by continued expansion in  net interest margin, further reductions in operating expenses and included the third payment in the antitrust settlement with Visa and MasterCard offset by higher loan loss provisions. Additionally, Provision for loan losses increased $530 million, or 91%, from the prior year due to higher net charge-offs and the addition of $108 million in loan loss reserves in excess of charge-offs in the quarter.

Managed loans ended the quarter at $51 billion, unchanged from the prior quarter and up 7% YOY, reflecting lower payment rate and decreased consumer spending. Sales volume decreased 4% versus the second quarter of 2008, reflecting lower gas prices and a general decline in consumer spending.

However, pretax income was $388 million in the second quarter of 2009 as compared to $309 million for the second quarter of 2008.

Net yield on loan receivables rose to 9.26%, an increase of 15 basis points from the prior quarter, and 70 basis points from the prior year. The increase from the prior year reflects lower cost of funds, accretion of balance transfer fees and an increase in revolving balances, partially offset by higher interest charge-offs and lower yields on variable rate assets.

The over 30 days delinquency rate on managed loans was 5.08%, down 17 basis points from the first quarter of 2009, reflecting seasonal trends and up 127 basis points from the prior year due primarily to higher levels of unemployment and the economic downturn. The managed net charge-off rate increased to 7.79% for the second quarter of 2009, up 131 basis points and 280 basis points from the prior quarter and the prior year, respectively. The managed net charge-off rate for the third quarter of 2009 is expected to be between 8.5% and 9%.

The Chairman and CEO of DFS said; “While the rise in unemployment continued to have a significant impact on our financial results, I am pleased with our strong relative performance in both credit management and sales volumes. We continue to focus on reducing expenses and maintaining a strong capital position as we manage through these challenging times”.