Discover 2Q profits drop 7 per cent, due to higher expenses; beats analyst expectations

Discover Financial Services on Wednesday reported a 7 per cent drop in second-quarter earnings, due largely to higher expenses.

The credit card and lending company’s net income allocated to common shareholders was $586 million, versus $630 million a year earlier. On a per-share basis, Discover said it had profit of $1.33, down from $1.35 a share a year earlier.

The results barely topped Wall Street expectations. The average estimate of 14 analysts surveyed by Zacks Investment Research was for earnings of $1.32 per share.

Revenue at Discover was effectively flat from the year before, at $2.18 billion in the period. Total loans were up 5 per cent to $69 billion. However, the amount of money spent on Discover’s payment network was down 3 per cent from a year ago.

Discover said had an 18 per cent jump in expenses from a year earlier, citing higher regulatory and compliance costs.

Part of Discover’s higher expenses this quarter resulted from company’s decision last month to close its mortgage lending business, which Discover had only just entered into a few years earlier.

Discover CEO David Nelms said mortgages ultimately did not become as profitable as the company thought they would. He cited higher regulatory costs, and expectations the Federal Reserve will raise interest rates later this year, which will likely drastically slow mortgage refinancing.

“We decided to exit the business before it could have possibly become a big drag on our earnings,” Nelms said in an interview.

Discover shares have dropped 9 per cent since the beginning of the year, while the Standard & Poor’s 500 index has increased roughly 3 per cent.

Separately, Discover, which is based in Riverwoods, Illinois, was ordered to refund $16 million to consumers and pay a $2.5 million fine related to the company’s student loan servicing business.


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