December 18, 2009
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News: Discover Income Down; Defaults Up
Discover Financial Services Inc (DFS) released fourth quarter results Thursday which showed net earnings down 14 percent from same time last year. The decrease was attributed to continued credit card defaults. Unlike its competitor American Express, Discover ended the fourth quarter with a decrease in shares. Net income for the credit card company was $370.7 million down from $432.3 million last year. The decrease brought earnings from 89 cents a share to 63 cents. The company also said it expects credit card defaults to remain elevated through the first quarter of 2010 as unemployment numbers continue to rise to record breaking highs.
Fourth quarter results include an after tax gain of $285 million stemming from the final payment of an antitrust settlement. Beginning 2010, the giant credit card company will be implementing a new accounting rule that requires the company to list the off the books securitized loans on the balance sheet The result means a $1.3 billion after tax charge to equity during the first quarter of 2010 which will increase assets by $21 billion and reserves by $2.1 billion. Unlike Visa and MasterCard, Discover loans credit on cards thereby netting income on interest and as a network, earns money on credit card transaction fees. However, Discover takes additional risks and unlike Visa and MasterCard, suffers due to card defaults.
Discover's credit card defaults for fourth quarter rose to 8.43 percent up from 8.30 percent in the previous quarter and 5.48 percent compared to same period last year. Although defaults increased, they remained below the earlier projections of 8.5 to 9 percent. Discover predicts defaults for 2010 first quarter to run between 8.4 percent and 8.9 percent. Card delinquencies of 30 days or more were at 5.31 percent up from 5.10 percent in third quarter and 4.56 percent same time last year. The company set aside $989 million for credit losses. Discover received $1.2 billion from the TARP bailout program and has yet to pay it back but expects it will be soon.