Discover Financial Returns to Profitability

Income from Discover's third-party payments business -- which processes ATM and debit transactions and other banks' cards -- rose sharply during the quarter to $20.6 million from $7.6 million during the final quarter in 2007. The boost was due to the addition of Diners Club International, which was acquired from Citigroup earlier in the year.

Discover's third-party payments business processed $34.04 billion in transactions during the quarter.

Average total loans during the quarter increased to $50.71 billion from $47.38 billion during the same quarter last year.

For the full year, Discover earned $927.8 million, or $1.92 per share, up from $588.6 million, or $1.23 per share, a year earlier.

Discover's larger competitors Visa and MasterCard, while not immune to the economic downturn, are more likely to tough out the difficult environment, given that they do not make consumer loans, and have come to rely -- Visa more than MasterCard -- on consumers using their debit cards for everyday purchases.

"We continue to favor Visa and MasterCard as credit risk-free, recession-resistant plays in the current environment (and beyond), and would avoid consumer lenders American Express and Discover due to consumer credit risk and their heavy dependence on capital markets for both short and long-term funding," writes John Williams, an analyst at Macquarie Research in a note earlier this week.

Discover's deposit base "leaves it much less dependent on publicly traded debt than American Express," Williams writes.

"Despite stable credit performance, a global growth slowdown will hurt, as [Discover] is highly leveraged to the slowing domestic card market," he writes.

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