Discover’s Profits Amaze The Street, As Less Consumers Default

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Discover Financial Services (NYSE:DFS) has posted impressive profits, exceeding Wall Street estimates. This comes as the credit card lender, which currently has a partnership agreement with eBay Inc’s (NASDAQ:EBAY) PayPal, embarks on a bullish stretch in light of fewer defaulted debts.

Net income, although 3.4 percent lower than a year earlier, beat the analyst estimate of $1.03 a share, coming in at $1.21 a share or $627 million . A year earlier, Discover Financial Services (NYSE:DFS) posted an income of $647 million. The Illinois based company noted that fewer borrowers defaulted, perhaps explaining the higher than expected profits.

51 year old David Nelms, the company’s CEO, shared insights on the improved credit quality. “Card sales and receivables grew in a challenging environment, while credit quality continued to improve,” he remarked. Nelms was noted to have repurchased his shares.

Other notable highlights alongside the bottom line include the company’s increased net interest income, which rose 11 percent, to reach $133 million.  Likewise, purchases made with the Discover cards leaped 4 percent on a year over year basis, coming in at $27.2 billion.

Another notable highlight is the increased legal costs, increasing by $94 million. These increased legal costs, coupled with $14 million in payments associated with regulatory claims, underscore the stringent legal formalities associated with financial services. As we had reported earlier, the credit card lender was compelled to refund $200 million to customers, after a prolonged controversy over the marketing of its credit protection products.

PayPal partnership signals renewed prospects

This fiscal year has been full of activity for Discover. Last month its stock surged in light of the transaction processing deal involving PayPal. Discover, which is the current fourth-best performer in the Standard & Poor’s 500 Financials Index, noted that the deal would be instrumental in driving heavier volume to its network.

The processing deal with PayPal will allow PayPal customers to shop at more than 7 million U.S merchant locations that take Discover. Donald Fandetti, a Citigroup Inc. (NYSE:C) analyst, notes that this agreement could improve Discover’s earnings outlook. Fandetti notes that the annual income could very easily increase by 6 cents a share, to as high as 23 cents a share.

Fewer borrowers default

During the quarter, Discover Financial Services (NYSE:DFS) wrote off $308 million in bad debts. This represents a 33 percent dip on a year over year basis, something that the company notes to be ‘historic lows’

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