Discover Financial Services (DFS) yesterday announced fourth-quarter earnings of 15 cents per share, which missed the Zacks Consensus Estimate of 20 cents. However, this came in better than the loss of 19 cents, reported in fourth quarter 2008. The sluggish result was primarily attributable to the deteriorating credit quality and consumer spending that adversely affected net-charge off rate and overall credit card sales volume.
 
During the quarter, Discover Financial recorded after-tax Visa/MasterCard antitrust litigation settlement charge of $285 million compared to $535 million in the prior-year quarter. Excluding this charge, net income from continuing operations was $86 million, compared to net loss of $91 million in fourth quarter 2008. For the full year 2009, net income from continuing operations was $94 million (18 cents), compared to $528 million ($1.09 per share) in 2008. This is excluding the after-tax Visa/MasterCard antitrust litigation settlement charge of $1.2 billion in 2009 compared to $535 million in 2008.
 
Discover Financial’s deposit balances originated through direct-to-consumer and affinity relationships were $12.6 billion, an increase of $2.4 billion from the prior quarter.
 
Segment Results on the managed basis are as follows:
 
In the U.S. Card segment, pretax income was $575 million during the quarter compared to $646 million in the fourth quarter of 2008. Discover Card sales volume declined by 1% to $22 billion from the prior-year quarter. Balance transfer volume declined 66% from the prior-year as the company reduced its marketing of promotional rate balance transfer offers. While managed loans were flat at approximately $51 billion, on year-over-year basis, the student loan portfolio grew by $513 million and credit card loans decreased by $670 million in the fourth quarter of 2009. Additionally, managed net charge-off rate rose to 8.43% and the over 30 days delinquency rate rose to 5.31% due to higher levels of three consumer bankruptcies and unemployment partially offset by a higher mix of student loans.
 
Management anticipates the managed net charge-off rate for the first quarter of 2010 to be between 8.4% and 8.9%.
 
In the Third Party Payments segment, pretax income grew by $3 million to $24 million as compared to prior-year quarter. Revenues rose by $6 million reflecting an increase in transactions on the PULSE network, lower incentive payments and higher fee revenues. The number of transactions on the PULSE network increased by 5% year over year to $677 million due to increased transactions from new and existing clients, partially offset by the loss of volume from one large financial institution. However, dollar volume for the fourth quarter of $33 billion was down 2% from the prior year.
 
During the quarter, Discover Financial’s wholly-owned subsidiary, Discover Bank, raised approximately $700 million through a subordinated debt issuance, increasing tier 2 regulatory capital. In addition, the company’s securitization trust issued $1.3 billion of asset-backed securities through the Term Asset-Backed Security Loan Facility (TALF) program.
 
Discover Financial’s board declared a cash dividend of $0.02 per share of common stock, payable on Jan 21, 2010, to stockholders of record at the close of business on Dec 31, 2009.
 
Overall, we believe that given the lower gas prices, a general decline in consumer spending that reflects a lower rate student loan balances along with lower balance transfer activity and sales volume, the company has to work vigorously on the managed loan portfolio. However, given the recovery in third party payments, modest capital position and cost cutting initiatives, it appears that Discover Financial will be able to show significant advancement with the overall improvement in the global economic scenario.
 
On Thursday, shares of Discover Financial closed at $14.92, down by 10%, on the New York Stock Exchange.
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