Discover returns to profit, raises dividend

NEW YORK (Reuters) - Discover Financial Services (DFS.N) reported a $465 million quarterly profit, recovering from a year-earlier loss, and raised its quarterly dividend, as losses on bad loans fell and its customers spent more.

Shares rose after-hours, as the credit card lender and processing network beat some analysts' expectations and restored its dividend to the level it paid before taking government aid during the financial crisis.

Revenues were "a little stronger than we thought they would be ... it was a strong quarter on the back of improving credit quality," said Sanjay Sakhrani, analyst at Keefe, Bruyette & Woods.

Discover declared a first-quarter dividend of 6 cents per share, up from the 2 cents it has paid over the past two years. It took $1.2 billion in Troubled Asset Relief Program aid during the crisis, and repaid the government last April.

It follows several larger banks that have raised their dividends since Friday, when the Federal Reserve gave the 19 largest U.S. banks the results of a second round of stress tests and authorized some to raise their dividends and buy back shares.

Chief Executive David Nelms also told investors during a conference call on Tuesday that the company would consider repurchasing shares "later this year."

CONFIDENT CUSTOMERS

Discover earned 84 cents per share in its fiscal first quarter, ended February 28. That compared with a year-ago loss of $104 million, or 22 cents per share.

Revenue rose about 2.5 percent to $1.73 billion.

Nelms attributed the company's results to "on-going improvements in credit performance and accelerating growth in Discover card sales," according to the earnings release.

Like other credit card lenders, Discover has seen losses on bad loans gradually drop from the highs of the crisis. Its net charge-off rate for the quarter fell to 5.96 percent, and the company released $271 million in loan-loss reserves.

Consumer spending also improved. Discover card sales volume was $24 billion during the quarter, a 7 percent increase from a year earlier. Nelms said in an interview that spending had continued to pick up over the past six weeks, in part due to higher gas prices but also because of increased consumer confidence.

Like American Express Co (AXP.N), Discover lends directly to consumers and also competes with Visa Inc (V.N) and MasterCard Inc (MA.N) to process transactions for banks.

It is increasingly trying to build up its transaction processing business and to expand beyond traditional credit card lending, as the industry struggles with weak loan growth and increasing regulation.

Last year, it bought Citigroup Inc's (C.N) student lending platform. It also launched a mobile payments venture with three of the top four U.S. mobile carriers: Verizon Wireless (VZ.N), AT&T Inc (T.N), and Deutsche Telekom's (DTEGn.DE) T-Mobile USA, which AT&T has agreed to buy for $39 billion.

Nelms said the interview that he did not yet know what effect that bid would have on the venture, "but I would not expect it to have an impact."

The venture, called Isis, told regulators in a letter last month that it and other mobile payments efforts could be threatened by proposed federal caps on debit card fees, including a restriction on exclusive transaction processing contracts.

"At an extreme, rules that were too tight could certainly impede the adoption of new technology and we're very focused on ensuring that that does not happen," Nelms told Reuters in the interview.