UPDATE 2-Customer spending, credit quality boost Discover results

Tue Apr 23, 2013 2:45pm EDT

* 1st-qtr EPS $1.33 vs est. $1.13

* Revenue, net of interest expense, rises 10 pct to $2 bln

* Credit card loans rise 5 pct to $48.7 bln

* Shares up nearly 2 pct

By Ashutosh Pandey

April 23 (Reuters) - Credit card company Discover Financial Services' first-quarter profit beat analysts' expectations as customer spending rose and credit quality improved.

The company, which has been trying to aggressively expand its various businesses, launched Discover IT, a new flagship credit card, in January. It has also forged partnerships with online companies such as eBay Inc and Google Inc to boost its payment services business.

The company's net profit rose to $673 million, or $1.33 per share, in the first quarter, from $650 million, or $1.21 per share, a year earlier. Revenue, net of interest expense, rose 10 percent to $2 billion.

Analysts expected the company to earn $1.13 per share, excluding items, according to Thomson Reuters I/B/E/S.

Expenses rose 12 percent to $753 million in the first quarter on higher employee compensation and marketing expenses associated with the Home Loan Center acquisition, increased card marketing initiatives and higher headcount.

The company, however, said its loan yields would remain under pressure as it continues to expand its product portfolio, including credit cards and student and home loans.

"We're working on a number of different opportunities that will depress profits in the second year term which we believe will position us for volume and revenue growth over the longer term," Chief Financial Officer Mark Graf said on a conference call.

He reaffirmed the company's full-year forecast for operating expenses of $3.1 billion, almost at the year-earlier level.

There is some pressure on card yields due to competition but Discover should be able to offset it with funding benefits as they grow their online deposits, said Janney Capital Markets analyst Sameer Gokhale, who has a "buy" rating on the stock.

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.

LOANS GROW

Credit card loans rose 5 percent to $48.7 billion in the quarter. Discover card sales volume rose 4 percent.

The credit card lender and payment processing network set aside $159 million to cover future bad debt, up 89 percent from a year earlier. Delinquency or late payment rates for loans over 30 days past due was 1.77 percent, up 33 basis points.

Net interest margin rose 30 basis points to 9.39 percent, reflecting decreased funding costs.

Discover increased its quarterly dividend by 43 percent to 20 cents last week. It announced a $2.4 billion share buyback program last month after the U.S. Federal Reserve approved its capital program.

Discover Financial's shares, valued at about $21.47 billion, were up 2 percent at $44.40 on the New York Stock Exchange on Tuesday. They have risen 12 percent in the last three months, outperforming the Thomson Reuters U.S. Consumer Financial Services Index that has risen about 6 percent.

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