Discover's Third-Quarter Profit Falls on Late Payment (Update1)

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Discover's Third-Quarter Profit Falls on Late Payment (Update1)

By David Mildenberg

Sept. 25 (Bloomberg) -- Discover Financial Services, the credit-card company spun off from Morgan Stanley, said third- quarter profit declined 11 percent as more customers were late with payments.

Net income declined to $180 million, or 37 cents a share, from $202.2 million, or 42 cents, the Riverwoods, Illinois-based company said in a statement today. Discover was expected to earn 35 cents, according to the average estimate of 12 analysts compiled by Bloomberg.

Discover has lost almost half its market value since it was spun off in June 2007, as U.S. household net worth declined for three straight quarters. Initial claims for unemployment insurance increased 43 percent from a year earlier on filings in Louisiana after Hurricane Gustav. Mounting job losses may stall consumer spending, which makes up more than two-thirds of the U.S. economy.

``Delinquencies have always been highly correlated with unemployment and it doesn't look like it will plateau very soon,'' said Michael Taiano, an analyst at Sandler O'Neill & Partners in New York who has a ``sell'' rating on Discover. ``The country's leverage is extraordinarily high and all those factors will continue to pressure consumers and make it harder for them to make monthly payments.''

U.S. Results

Income from the U.S. card business dropped to $245 million before taxes, a 36 percent decline from the year-earlier period.

``Discover's credit performance has performed relatively better than others in the industry,'' Taiano said. ``They haven't had a lot of growth over the last few years and losses have tended to be more tilted toward newer loans. And they also have less exposure to California and Florida, two areas most hit by the housing price decline.''

Discover bought Citigroup Inc.'s Diner's Club International for $165 million in July to add income to its payment network overseas. The acquisition will contribute $10 million to $15 million a year in pretax profits, Chief Executive David Nelms has said.

Like New York-based American Express Co., Discover extends credit and runs a network that processes transactions for other lenders. Visa Inc., the biggest credit-card network, and MasterCard Inc., ranked second, operate networks without making loans to consumers.

Discover and other credit-card issuers may face increased regulation in 2009 after the U.S. House of Representatives on Sept. 23 approved legislation to ban predatory billing practices, Merrill Lynch & Co. analyst Kenneth Bruce said in a report yesterday.

American Express, Capital One and Discover ``will face lower net-interest margin and fewer fee incomes in 2009 if the bill becomes law,'' Bruce wrote in a research report. The Senate hasn't acted on the legislation, which President George W. Bush opposes, Bruce said.

http://www.bloomberg.com/apps/news?p...iC.8A&refer=us