Discover Gains Despite Loss View

NEW YORK (TheStreet) -- Discover Financial Services (DFS) shares dipped then chugged higher on Friday morning following announcement that the credit card issuer would post a loss for its fiscal first quarter on higher loan loss reserving.

After Thursday's closing bell, Discover said it expects a loss of 22 to 23 cents a share for the three-month period. The Riverwoods, Ill.-based firm said it's increasing loan loss reserves by $305 million on a pre-tax basis. The increase brings Discover's reserve level to cover approximately 12 months of losses, it said.

Discover attributed the addition to a change in its reserving methodology that included "a new analytical process that enhances management's ability to estimate incurred losses on non-delinquent accounts," it said.

Analysts on average were expecting the company to post a profit of 9 cents a share for the quarter, which ended on Feb. 28, according to the average estimate of analysts polled by Thomson Reuters.

Discover is slated to report its full first-quarter results after the markets close on Tuesday, March 16.

The company also said net charge-offs for its Direct Banking unit rose 7 basis points from the fourth quarter to 8.5%.

But, on a positive note, the company said delinquencies fell in the quarter. Discover expects loans more than 30 days delinquent to total approximately 5% of its loan book, down 25 basis points on a sequential basis. Discover believes that based on current credit performance trends within its loan portfolio, delinquent loans may have peaked in the fourth quarter.

The optimistic news likely fueled Friday's turnaround. After dipping at the start of the session, Discover shares were rising 0.4% to $14.98 with roughly 3 million shares changing hands in the first half hour of trading. Shares of Discover's main rivals, American Express (AXP) and Capital One (COF), were also rising 1.5% to $40.69 and 1.6% to $40.44, respectively.