Growth in credit card and personal loans help lift Discover Financial's 2Q profit 7 per cent

LOS ANGELES, Calif. – Discover Financial Services’ net income grew 7 per cent in the second quarter as credit card spending and overall loans increased from a year ago. The results beat Wall Street’s expectations.

The credit card issuer and lender said Tuesday that card loans and sales volume for the company’s namesake card both climbed 6 per cent, reflecting increased spending by its cardholders. More of those cardholders also elected to carry balances rather than pay them off, helping drive interest revenue for the company.

Personal loans jumped 26 per cent, while private student loans rose 5 per cent. All told, total loans jumped 7 per cent in the April-June quarter.

“We are achieving increased wallet share with existing customers and adding loans from new accounts as well,” Discover Chairman and CEO David Nelms said during a conference call with Wall Street analysts.

Discover has been working to expand its credit card business, adding features like free credit scores on cardholder statements and a new cash-back reward card aimed at students. It’s also taken steps to make its private student loans more attractive, including introducing lower interest rates for students applying for loans and offering a 1 per cent cash reward for borrowers who achieve good grades.

The Riverwoods, Illinois-based company’s latest results suggest consumers are feeling better about spending and taking on debt, something echoed by recent retail sales and consumer borrowing data.

Consumer spending at retail stores picked up an average of 0.5 per cent in the April-June quarter after a severe winter weighed on sales earlier this year.

Increased retail spending can help drive profits for credit card issuers like Discover. All told, U.S. credit card debt is up 2.5 per cent over the past year, according to the Federal Reserve.

Employers are hiring at a healthy pace, which is making Americans more confidence to spend. Employers added an average of 230,000 jobs a month in the first half of this year, up from 194,000 a month in 2013. That’s knocked the unemployment rate down to 6.1 per cent, the lowest in nearly six years.

Transaction volume growth for Discover’s payments services business rose 3 per cent in the second quarter. It grew 4 per cent for the company’s PULSE network.

Meanwhile, the late-payment rate by its cardholders edged higher during the quarter. The rate of card loans more than 30 days past due rose to 1.63 per cent, up 5 basis points from the year-ago period.

For the three months ended June 30, Discover’s profit after paying preferred dividends rose to $630 million, or $1.35 per share. That compares with net income of $588 million, or $1.20 per share, a year earlier.

Revenue net of interest expense rose 6 per cent to $2.17 billion from $2.04 billion.

Analysts polled by FactSet expected earnings of $1.30 per share on $2.16 billion in revenue.

Discover shares ended regular trading up 76 cents to $64.06. The stock slipped 85 cents, or 1.3 per cent, to $63.21 in extended trading. Discover is up 14.5 per cent this year.