UPDATE 3-Discover profit falls short as costs climb

Thu Dec 20, 2012 1:23pm EST

* Fourth-quarter EPS $1.07 vs est $1.13

* Net revenue $1.99 bln vs est $1.97 bln

* Expenses jump 20 pct

* Shares fall nearly 6 pct

By Tanya Agrawal

Dec 20 (Reuters) - Credit card company Discover Financial Services reported a quarterly profit that fell short of analysts' expectations as it spent more on building its new payment partnerships and other businesses, sending its shares down as much as 6 percent.

The company said costs rose 20 percent to $800 million in the fourth quarter as it increased hiring, paid more in compensation and raised its marketing spend.

Discover has been expanding its payment services division as it seeks new areas for growth. It signed a deal in August with PayPal, the online payment service of eBay Inc, under which PayPal users can buy from merchants using Discover's payment network.

It has also tied up with Google Inc to allow users link their Discover cards directly to Google Wallet and has started making home loans after buying home loan center assets from online loan provider Tree.com in May.

The company said pretax income in its payment services unit fell 21 percent to $33 million but transaction volumes rose 13 percent to $49 billion as it continues to invest in the segment.

"The payments business leveraged our network and acceptance footprint to achieve record volumes. We entered into several key partnerships, which we expect to be drivers of huge profitability," Chief Financial Officer Mark Graf said on a post-earnings conference call.

Although one analyst said the company had spent more money on its expansion plans than was expected, others said the expenses were justified.

"The increase in expenses is because the company is strengthening its fundamentals. It is a consequence of growth and is resulting in an improvement in the business lines," said Sanjay Sakhrani, analyst with Keefe, Bruyette & Woods.

Discover's delinquency rates continued to decline as fewer people defaulted on their credit card payments, and were at 1.86 percent compared with 2.39 percent a year earlier.

CARD SALES ROBUST

Fourth-quarter profit rose 7 percent to $551 million, or $1.07 per share, from $513 million, or 95 cents per share, a year earlier.

Analysts on average had expected earnings of $1.13 per share, excluding items, according to Thomson Reuters I/B/E/S.

Provision for loan losses rose 6 percent to $338 million as its loan portfolio increased 6 percent to $61 billion.

Credit card loans rose 6 percent to $49.6 billion in the quarter ended Nov. 30 on a 6 percent rise in card sales volumes, driven by holiday season shopping.

U.S. consumer confidence rose to a more than five-year high in early November on an increasingly upbeat view of the economy and jobs market.

Discover, like American Express Inc, lends directly to consumers but its business is a quarter of its rival's size. The two companies compete with Visa Inc and MasterCard Inc to process transactions for banks.

Shares of the Riverwoods, Illinois-based company were down 5 percent at $37.97 in afternoon trading on the New York Stock Exchange on Thursday. The shares have risen about 68 percent since the beginning of the year to Wednesday.

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