UPDATE 4-Discover oper loss smaller than expected; stock up

* Oper loss 18 cents per share; Street view loss 29 cents

* Charge-off rate climbs to 7.79 pct, less than expected

* Delinquency rate falls to 5.08 percent

* Shares rise 4.04 percent (Adds interview with CEO, updates stock price)

By Juan Lagorio

NEW YORK, June 18 (Reuters) - Discover Financial Services (DFS.N) reported a smaller-than-expected quarterly operating loss as the fourth-largest U.S. credit card network cut costs and bad loans grew less than forecast, sending its shares up 4 percent.

Discover's expenses fell 10 percent as it cut 500 jobs and trimmed marketing spending, and its credit card default rate remained well below levels at its bigger rivals.

In addition, Chief Executive David Nelms told Reuters that the pace of growth of charge-offs -- loans the company does not expect to be repaid -- and delinquencies -- an indicator of future credit losses -- was decelerating, suggesting they could peak by the end of 2009 or in early 2010.

The Riverwoods, Illinois-based company posted an operating loss of $69 million, or 18 cents per share, for the fiscal second quarter that ended May 31, compared with an operating profit of $202 million, or 42 cents per share, a year earlier.

Analysts on average had forecast a loss of 29 cents a share, according to Reuters Estimates.

Net income was $226 million, or 43 cents per share, helped by $295 million from an antitrust settlement with Visa Inc (V.N) and MasterCard Inc (MA.N). Year-earlier net income was $234 million, or 48 cents per share.

"Discover posted solid quarterly results in a challenging environment," Sandler O'Neill analysts said in a note.

Discover's charge-off rate climbed to 7.79 percent in the second quarter from 6.48 percent in the first quarter but was well below rates at its bigger rivals.

"That sounds fairly low. That would be something that, at least on the surface, is optimistic or positive" compared with other credit card companies, said Ken Crawford, a senior portfolio manager at Argent Capital Management.

DELINQUENCIES FALL MORE THAN EXPECTED

The delinquency rate also fell more than expected, to 5.08 percent from 5.25 percent in the previous quarter.

While analysts had anticipated a seasonal contraction -- as consumers usually use tax refunds to pay back debt -- they forecast delinquencies could resume an upward trend as debt-burdened consumers keep losing their jobs.

However, Nelms said consumers were more prepared now to deal with a recession than six or nine months ago, suggesting delinquencies could be near a peak.

"Someone who is losing his job today may be more prepared than someone who was hit suddenly in September or even January this year," Nelms said in an interview. "By now, a lot of consumers have already prepared for this tough time, they are saving money, they have pulled back on purchases like a new car."

Thanks to its conservative expansion policy in recent years, Discover is less exposed to bad loans than most of its rivals.

The firm forecast its charge-off rate would rise to between 8.5 and 9.0 percent in the third quarter, still well below the 10 percent-plus expected for bigger rivals such as Bank of America Corp (BAC.N) and American Express Co (AXP.N).

The company set aside $108 million more in the second quarter to cover credit losses, less than analysts estimated.

"Two months ago ... it was hard for me to see tangible signs of improvement, but I'd say the recent trends in delinquencies, the continuing improvement in consumer confidence, the reopening of a lot of financial markets, all of these things are real signs that things are starting to improve," Nelms said.

Discover shares ended up 36 cents at $9.27 on the New York Stock Exchange. (Reporting by Juan Lagorio; Editing by Phil Berlowitz)