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Bad Debt Slaps Discover

Discover Financial reports earnings in line with estimates, but a mounting book of bed credit card debt is the big problem for the market on Thursday morning, which is treating Discover like a credit card needing to be cut.

(Discover Financial story with corrected financial and updated share price)



) -- If

Discover Financial Services

(DFS) - Get Report

was a credit card, investors would have been cutting it in half on Thursday morning.

Discover Financial reported earnings in line with estimates on Thursday morning, but an increased percentage of credit-card loans not repaid to Discover sent shares down close to 10% by mid-day.

The percentage of loans that Discover expects not to be repaid reached near 8.5%, and the level of loans 30 days or more past due edged up to 5.3%.

It was possible to discover some good news in Discover's earnings, though: sales volume -- the amount charged on Discover's cards -- shows signs of stability, slipping less than 1% to $21.9 billion.

The extent of the bad loans led to a fourth-quarter profit drop of 19%. Discover's provision for loan losses, or the amount it sets aside to cover bad loans, was $989 million, down from $1.1 billion in the same quarter a year ago, but up from $924.4 million in the second quarter.

Discover is far from alone among credit card companies that have recently reported increasing levels of unpaid debt. Discover rivals

American Express

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Capital One Financial

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both reported higher levels of loan losses from a year ago in their most recent quarters. Both competitors were also down on Thursday morning, though to a significantly lesser degree than Discover's 8% dip.

Net income for the quarter ended Nov. 30 was $352 million, or 63 cents, down from $432 million, or 92 cents per share, in the same period a year earlier. Results in the most recent quarter included a $285 million gain from the settlement of an antitrust lawsuit with


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Analysts estimates had placed core earnings per share -- ex non-recurring items, including an anti-trust settlement -- between 10 cents and 14 cents a share. The core EPS number came in at 12 cents.

For the full fiscal year, Discover earned $1.2 billion, or $2.42 per share, compared with $927.8 million, or $2.20 per share, in the previous year.

Discover received $1.2 billion from the federal government under the Troubled Asset Relief Program earlier this year, which the credit card company has yet to pay back. In that respect, Discover Financial looks much like the mounting and bad credit card debt that was pummeling its shares on Thursday morning.

-- Reported by Eric Rosenbaum in New York.

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