Friday, March 11, 2011

Discover Financial Services (NYSE: DFS): Q1 Earnings Preview 2011

Discover Financial Services (NYSE: DFS) is scheduled to release first quarter earnings after the closing bell on Tuesday, March 22, 2011. Analysts, on average, expect the company to report earnings of $0.49 per share on revenue of $1.64 billion. In the year ago quarter, the company posted a loss of $0.22 per share on revenue of $1.69 billion.

Discover Financial Services, together with its subsidiaries, operates as a credit card issuer and electronic payment services company primarily in the United States.

In the preceding fiscal fourth quarter, net income was $346.52 million or $0.64, compared with a loss of $77.86 million or $0.14 a year ago. Revenue, net of interest expense, declined in the fourth quarter to $1.60 billion from $1.73 billion in the prior-year quarter. Analysts, on average, expected the company to report earnings of $0.20 per share on revenue of $227.27 million.

The company is seeking to expand its global presence to increase revenues. Discover Financial Services recently reached an agreement with Puerto Rico's largest bank that will allow cardholders to make purchases at more than 20,000 locations on the island.

In a regulatory filing last month, the company said that it wrote off $90.3 million, or 5.75 percent of balances at an annualized rate, as uncollectible in January. That was down from $95.2 million, or 5.94 percent annualized, in December. Card companies typically write off loans after they're 180 days past due. The rate of late payments also fell. Payments late by 30 days or more, known in the industry as the delinquency rate, dropped to 3.84 percent in January, from 3.91 percent for December. A year ago, the delinquency rate stood at 5.55 percent. Delinquency is considered an indicator of default for what to expect for defaults, or charge-offs, in coming months.

The credit services industry is benefiting from increased consumer spending, improved commercial loan activity and a greater global presence. Industry wide, the charge-off rate peaked in the 2010 second quarter at 10.37 percent of balances, according to the latest Federal Reserve data. The improvements came as consumers turned to using credit cards more often during the holiday season, after pocketing their plastic throughout the recession.

However, few regulatory changes could offset the gains seen by the industry. Credit card companies are trying to convince Congress to delay a capping rule that was part of the Dodd-Frank Financial Reform Bill. The capping rule would affect the amount merchants are charged for each debit-card transaction. The rule would cap transaction fees at 12 cents instead of the existing 1% of the purchase price. Despite the fact that credit card companies pass these fees along to banks it is feared that the capping rule will have a long-term affect on U.S debit volume growth and could encourage issuers to recommend other payment methods.

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