Discover Financial Services reported a higher-than-expected quarterly profit on Monday as charge-offs fell and consumers spent more on their credit cards, sending its shares up about 3 percent.
The credit card lender and transaction processing network reported profit of $260.6 million, or 47 cents per share, well above analysts’ average expectations of 38 cents per share.
“The most significant factor in our performance was the improvement in credit,” Chief Executive David Nelms told investors during a conference call.
He said he was “also pleased” with the increase in consumer spending. Discover customers spent about $24 billion on its cards during the quarter, a 5 percent increase from a year earlier.
But like other credit card lenders, Discover is struggling with weak consumer demand for new loans. The company’s portfolio of credit card loans fell by $2.9 billion from the previous year, to $45.2 billion.
Discover is increasingly looking for growth from other types of lending and financial services, including online deposits and student loans. It said on Friday it would pay $600 million for Citigroup Inc’s (C.N) student lending platform and private loans. [ID:nN17134586]
The company is also planning to expand into mortgage lending and checking accounts “organically or inorganically” through buying existing businesses, Nelms told Reuters in an interview on Monday. Such deals will likely not happen before the end of this year, he said.
Discover does not immediately plan any additional deals in the student loan area, but Nelms said during the conference call that he would not rule them out.
The deal with Citigroup will add $4.2 billion of loans and related assets to Discover’s portfolio. The company said in a regulatory filing on Monday that it expects to gain about 300,000 new customers with the portfolio, which “creates opportunity” to sell them other financial products and services.
But analysts were skeptical about Discover’s ability to sell its credit cards to new student loan customers.
“That’s the Holy Grail of banking,” FBR Capital Markets analyst Scott Valentin said. But “historically banks have not done a good job of cross-selling.”
Sandler O’Neill analyst Michael Taiano said the deal “made sense from a strategic standpoint, given that they want to grow in this business and they didn’t have a legitimate platform, and this obviously gives them much bigger scale. … And they got it at a reasonable price.”
But student lending is a tricky business, which itself has “shrunk considerably over the past couple years,” he said. “I always get nervous when companies buy things outside” of their core businesses.
Nelms defended the deal on the call and during the interview, telling Reuters that it will be primarily “a way to get significant new relationships, and to make what we think will be strong returns in a fast-growing market.”
Discover is also trying to build up its transaction-processing network, which competes with Visa and MasterCard to process credit and debit card transactions for banks. The company said it processed a record $39 billion worth of transactions for other banks during the third quarter, up 8 percent from a year earlier.
Losses on Discover cards also continued to improve, with net charge-offs falling to 7.18 percent from 7.97 percent in the second quarter. Discover released $187 million in loan loss reserves for the quarter.
The Riverwoods, Illinois-based company’s profit fell 55 percent from $577.4 million, or $1.07 per share, a year earlier for the third quarter ended on August 31.
But the year-earlier results included an after-tax gain of $287 million related to an antitrust settlement with Visa and MasterCard.
Discover’s shares were trading up 3 percent at $16.04 at mid-afternoon.
