Loan growth helps boost Discover Financial Services' 2Q net income by 13 percent

An increase in loans and interest income helped boost Discover Financial Services' net income by 13 percent in the second quarter, trumping Wall Street expectations.

The credit card issuer and lender said Tuesday that sales volume for its namesake credit card grew 4 percent to $27.6 billion in the April-June period. Credit card loans rose 5 percent to $49.8 billion.

David Nelms, Discover's chairman and CEO, told Wall Street analysts during a conference call that card loan growth during the quarter was at the high end of what the company expected. He also noted that card spending trended higher as the quarter went on, ending with spending being up in June versus the same month last year.

"So on the one hand it feels like we might have a little more momentum building," Nelms said. "On the other hand, we still see a lot of mixed economic data coming in."

Credit card issuers such as Discover benefit from an improving economy and consumer spending.

This year, the economy is showing more robust signs of growth, with employers having added an average 202,000 jobs the past six months, up from 180,000 in the previous six. The housing market is also gaining strength. And consumer confidence last month hit the highest level since January 2008, according to the Conference Board.

While consumers are increasing their spending, their pace has dropped off sharply from the start of the year. Core U.S. retail sales — which excludes volatile spending on autos, gasoline and building supplies — increased from April through June at a 2.7 percent annual rate. That's down from a 4.2 percent rate during the first three months of the year.

Nelms said in an interview that the growth in consumer confidence bodes well for card spending, which has been outpacing loan growth for some time. He noted that the rate of late payments has fallen to all-time lows, which suggests that unemployment isn't an issue for the company's cardholders and borrowers.

"So I'm not sure the unemployment rate is going to necessarily impact us going forward," Nelms said.

Apart from credit cards, Discover benefited from loan growth across several of its operating units, including private student loans, personal loans and home loans.

Private student loans grew 5 percent from a year earlier, while personal loans, which many borrowers are using to pay down debt, jumped 22 percent.

All told, overall loans increased 6 percent to $61.7 billion from a year earlier. Net interest income, or money earned from loans, rose by 9 percent to $1.43 billion.

The company sees an opportunity for demand in home equity loans, as home values continue rise and mortgage interest rates increase, making refinancing a less attractive option for homeowners.

Discover's payment services business didn't fare as well as its other segments. It generated a $21 million loss for the quarter, partly because of charges that Discover booked to support its Diners Club International franchises in Europe.

Some of Discover's local partners in Europe are struggling through the region's economic slowdown. So, in order to minimize a disruption to cardholders, Discover acquired the Diners Club franchise in Italy and is providing financial assistance to help a European bank acquire the franchise.

"I don't see Europe turning around really quickly, but I also don't see it being a major drag to Discover," Nelms said.

For the three months ended June 30, Discover posted a profit after paying preferred dividends of $588 million, or $1.20 per share.

Revenue net of interest expense climbed to $2.04 billion from $1.87 billion.

Analysts polled by FactSet expected earnings of $1.15 per share on $2 billion in revenue.

Riverwoods, Ill.-based Discover, best known for its namesake credit card, is the sixth-largest U.S. credit-card issuer.