Earnings Preview: Discover to report 4Q results

Associated Press

LOS ANGELES (AP) -- Discover Financial Services is expected to post a bigger profit in its fiscal fourth quarter, which coincided with the tail end of the back-to-school shopping season and the ramp up to the December holidays — key periods when consumers traditionally spend more. The credit-card issuer and payments-network operator reports before markets open on Thursday.

WHAT TO WATCH FOR: Whether back-to-school and holiday season shopping helped boost the use of Discover's namesake credit card in the September-to-November quarter. And whether fewer cardholders made on-time payments as they shelled out more money on purchases.

Discover has reported improvement in its customers' default and late-payment rates since the Great Recession, as cardholders moved to pay down debt and boost savings. Its credit-card loans over 30 days past due sank to an all-time low in the third quarter, while loans written off as unpaid also declined.

But late-payment rates tend to creep higher in the fall, particularly as cardholders spend more money on holiday shopping, travel and other expenses.

In addition, Discover has been making more loans, which can result in higher delinquencies. To gird against that possibility, the company sets aside funds to cover potential loan losses.

Investors monitor how much money lenders set aside to cover bad loans because the so-called loan-loss provisions can weigh down earnings.

Wall Street also will have an eye out for an update on Discover's payment-services business, which competes with Visa and MasterCard. In the third quarter, Discover saw transaction volume for the segment rise 13 percent to $50.3 billion.

As of June, Discover also has a foothold in mortgage lending, having acquired the business from Tree.com Inc. for $45.9 million. Discover also has waded into fixed-rate private student loans.

Its latest results also should provide some sense of how the new lines of businesses are paying off.

WHY IT MATTERS: Discover, which is based in Riverwoods, Ill., is the sixth-largest U.S. credit-card issuer. Card companies have been reporting an increase in customers using cards and paying their balances off in the same month — meaning their balances don't rise. That limits a card issuer's gains from charging interest, but it's good for consumers.

WHAT'S EXPECTED: Analysts polled by FactSet, on average, expect Discover to report earnings of $1.11 per share on $1.96 billion in revenue.

LAST YEAR'S QUARTER: In last year's fiscal fourth quarter, Discover posted earnings of 95 cents per share on revenue of $1.81 billion.