Discover Financial Services reported a 7% drop in quarterly earnings on Tuesday, driven by rising expenses, a growing loss provision and shrinking yields in its flagship credit card business.
The Riverwoods, Ill., company earned $586 million in the first quarter, or $1.28 per share, which was down from $631 million, or $1.31 per share, in the same period a year earlier.
The first quarter drop-off in net income came on the heels of
For the quarter that ended March 31, Discover's decline in earnings was less severe, but it couldn't be chalked up to one-time charges.
Discover's operating expenses rose to $873 million, an 11% increase from a year earlier, due to more spending on marketing, larger legal reserves, higher employee compensation, and expenses related to the firm's anti-money laundering compliance program. Discover has been operating under a regulatory order aimed at improving its defenses against money laundering.
The rise in marketing spending at Discover
During the first quarter, Discover boosted its provision for loan losses to $390 million, a 43% increase from a year earlier. That move came as Discover's net charge-off rate for credit card loans rose by eight basis points to 2.40%. (The firm's 30-day delinquency rate on credit card loans fell by eight basis point to 1.64%.)
Discover reported that its credit card yield was 12.05%, which was down nine basis points from the previous year.
The earnings report did contain some bright spots. Discover's loans outstanding totaled $67.6 billion, up 6% from a year earlier. The company's credit card loans rose by 5.1%, personal loans rose by 17.5%, and private student loans rose by 3.9%.
In a news release, Chief Executive Officer David Nelms characterized the loan growth as "solid."
Discover's net interest income rose 4% to $1.63 billion, while its net interest margin fell by 18 basis points to 9.69%.
