December 19, 2008
-
News: Where is Discover Going?
From this point, much expansion is in the winds. Discover's CEO, David Nelms, speaks of expanding beyond their single branch in Delaware. He touts the company's great product lines and the credit card lending company's admirable longevity. Like Bank of America (B of A), Discover will gain enhanced credit card security from deposits. Most of the credit card industry has relied heavily on securitization (selling packaged debt to secondary investors) for good revenues. But that all died with the mortgage lending debacle. So now, nearly all of the credit card lenders are in a hurt. Discover was wise enough early on to shore themselves up for the rainy day. Although they too were hurt by the loss of securitization, they have hedged themselves to not crumble because of it. If it comes back, they will do well but, if it doesn't, Discover will still be ‘OK', where many others won't. Nelms remains optimistic.
So, for right now, Discover has about $29 billion in deposits to fall back on (as of Nov. 30). Adding $1.2 billion more from the government won't hurt a thing. They would be in a great position to take on more credit card consumer lending. The company is already looking good with a show of double earnings over last year. They've risen from a $0.44 EPS rating up to $0.92. Net quarterly income looks great too. They've risen from a $56 million loss last year to a $432 million gain this year. Fiscally, the credit card lender has increased from $589 million annual net to $928 million.
Again, this wellbeing does not come from good fortune, that is rare to find these days. Through wise management, Discover had the wisdom to ‘put away acorns' to fend against the coming deluge of credit card loan defaults. The econo-doom was written on the wall and these people were quick to prepare for it by increasing their default provisions by 89% ($521 million).
Sure enough, they were pulled into the collapse maelstrom and bashed with a 30-day delinquency surge from 3.58% last year to 4.56% this year. They had to write off 5.48% of their loans. This was the same demise the rest of the credit card industry suffered but, Discover was able to weather it. The ‘uncollectible' surge is expected to continue up to 6.0% in the coming year.