Discover: Credit Card Late-Pays Ease, But Sees 1Q Loss

DiscoverDiscover Financial Services sees a more positive outlook for 2010 with a stabilizing credit card delinquency rate, but it took a net loss of $104 million, or 22 cents a share, in the first quarter ended Feb. 28 – that includes a previously announced loan-loss reserve increase of $305 million.
Its first quarter loss compares to a net income of $120 million for the first quarter of 2009.
Results for the first quarter of 2010 included the pre-tax addition to loan reserves, which now provides the credit card company with coverage to about 12 months of losses.
The Discover Card issuer and payment processor said its 30-day delinquency rate was 5.05 percent, an improvement of 21 basis points from the prior year and 26 basis points from the prior quarter, reflecting better overall credit card trends.
Discover card sales volume increased 5 percent from the prior year to $22 billion.
“Based on these trends, the company believes that the amount of delinquent loan balances may have peaked in the fourth quarter of 2009,” Discover said.
Discover, though, is still facing challenges.
The credit card company also said it has received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the U.S. Treasury under its primary bailout vehicle, the Troubled Asset Relief Program.
Discover’s net charge-off rate on loans deemed uncollectible increased to 8.51 percent for the first quarter of 2010, up 203 basis points from a year earlier; and 8 basis points from the prior quarter.
The charge-off rate “reflects elevated levels of consumer bankruptcies and unemployment, partially offset by a higher mix of student loans which have a lower charge-off rate,” Discover said.
Discover projects the net charge-off rate for the second quarter of 2010 between 8.0 percent and 8.5 percent.
“Discover’s performance this quarter reflects the emergence of a more favorable economic environment, as our Discover card sales volume has now shown four consecutive months of year-over-year growth and delinquency levels have declined,” said David Nelms, chairman and chief executive officer of Discover. “We were also pleased with the continued strong growth of our direct-to-consumer deposit business.”
Nelms added that the reserve increase this quarter “is consistent with our conservative balance sheet management approach.”

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