Discover Income Drops 16% During Another So-So Quarter

Credit card issuer and processing network Discover Financial Services (NYSE: DFS) today reported net income of $202 million for its fiscal third quarter ended August 31, 2007, compared with net income of $241 million for its fiscal third quarter of 2006.

Marketing expenses rose from $145 million a year ago to $163 million in the recent quarter. Receivables rose to $51.9 billion, up 4 percent from the same period a year ago as credit card sales volume reached a record $26.8 billion, also up 4 percent.

Worldwide, Discover’s managed credit card net charge-off rate was 3.95 percent, down 28 basis points from the fiscal second quarter while the managed 30 day delinquency rate rose 18 basis points from the second quarter to 3.30 percent.

In the U.S. the credit card 30 day delinquency rate was 3.16 percent, down from 3.31 percent a year ago. The managed credit card net charge-off rate of 3.70 percent was up 15 basis points from last year.

Discover’s International credit card business, made up primarily of its Goldfish brand in the United Kingdom, saw a pretax loss of $67 million for the quarter compared with a pretax loss of $30 million for the third quarter of 2006. Discover attributed the rise to an increase in its provision for loan losses, an increase in expenses, and a decrease in net interest income reflecting higher funding costs post spin-off and the higher interest rate environment in the U.K.

The international card group’s 30 day delinquency rate was 4.89 percent, up 42 basis points from last year. The net charge-off rate of 6.56 percent represented a rise of 15 basis points from last year.

Transaction volume on Discover’s ATM/debit PULSE Network grew to 594 million, up 26% over last year. Discover announced merchant acquiring agreements with Chase Paymentech, Wells Fargo Merchant Services and Bank of America Merchant Services, giving it deals with firms representing over 90% of U.S. industry sales volume.

Morgan Stanley spun off Discover on June 30. Discover stock was down 2.8 percent to $21.63 in midday trading today.