* 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 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
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
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.