Discover posts profit; applies for government funds

By Juan Lagorio

NEW YORK (Reuters) - Discover Financial Services, the fourth-largest U.S. credit card network, reported a fourth-quarter net profit thanks to a gain of $535 million from a litigation settlement, and said it applied for government funds, sending shares up 16 percent.

The Riverwoods, Illinois-based company said it applied to the Federal Reserve to become a bank holding company to gain access to a $700 billion government funding plan, as a tightening in credit markets in the last quarter has hit the company's financing costs.

"As part of our capital management, we are seeking to participate in the Treasury's Capital Purchase Program which will further support our consumer lending operations," David Nelms, Discover's chief executive, said in a news release.

Credit card companies are becoming the latest victim of a crisis that began with the collapse of the U.S. housing and subprime mortgage markets and spread around the world, battering banks, companies and financial markets.

As recession deepens and unemployment reaches its highest level in 15 years, the industry outlook is gloomy.

Bad loans increased in the fourth quarter and Discover had to set aside more money to cover credit losses as unemployment rose and the economy eroded.

Discover posted net income of $432.3 million, or 89 cents a share, including after-tax proceeds of $535 million from a legal settlement with Visa Inc and MasterCard Inc over anti-competitive practices.

The company reported a net loss of $56.5 million, or 12 cents a share, a year earlier, when it took a charge related to its former UK Goldfish credit-card business.

"It looks like they definitely took advantage of the settlement, from the money they are getting from that," said John Williams, an analyst at Macquarie Research.

"I think it was a pretty ugly quarter from a credit perspective. From a spending perspective, It looks like they definitely see some slowdown in terms of people using their credit cards," he added.

The company's provision for loan losses increased 89 percent to $1.1 billion as net charge-offs rose.

Discover's charge-off rate, a measure of bad debt write-offs, climbed to 5.48 percent in its fourth fiscal quarter from 3.85 percent a year earlier. Its 30-day delinquency rate rose to 4.56 percent from 3.58 percent a year ago.

Discover has estimated its credit losses will peak in 2009.

Managed loans increased 6 percent to $51 billion compared with last year, but Discover Card sales fell 2 percent to $22 billion.

Discover shares were up 16.2 percent at $9.97 on Thursday morning on the New York Stock Exchange. Through Wednesday, the shares had fallen 43 percent this year.

(Editing by John Wallace and Matthew Lewis)