Earnings Preview: Discover to report 3Q results

Analysts expect Discover Financial to match year-ago profit in fiscal third quarter

Associated Press

LOS ANGELES (AP) -- Discover Financial Services is expected to match its year-ago profit in the June-August quarter, a period during which the credit card issuer and payments-network operator began making home equity loans. The company reports after the markets close on Monday.

WHAT TO WATCH FOR: Cardholder spending and payment trends during the quarter, as well as an update on how the company's home equity lending business, which launched in August, is faring.

Earlier this week, American Express and Capital One Financial each reported increased spending by cardholders.

Last summer, Discover acquired a foothold in mortgage lending after purchasing 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.

Discover has said that its home equity business likely won't be a factor on its bottom line before next year. But it sees an opportunity for demand in home equity loans, as home values continue to rise and mortgage interest rates increase, making refinancing a less attractive option for homeowners.

Wall Street also will be seeking an update on Discover's payment-services business, which competes with Visa and MasterCard. In the second quarter, Discover's payment services business generated a $21 million loss, partly because of charges Discover booked to support its Diners Club International franchises in Europe.

Some of Discover's local partners in Europe have been struggling through the region's economic slowdown. So, in order to minimize a disruption to cardholders, Discover acquired the Diners Club franchise in Italy and is providing financial assistance to help a European bank acquire the franchise.

WHY IT MATTERS: Discover, which is based in Riverwoods, Ill., is best known for its namesake card and is the sixth-largest U.S. credit-card issuer. The company has been working to grow its credit card business, while also pushing further into direct banking, offering auto, personal, student loans and home equity loans.

WHAT'S EXPECTED: Analysts polled by FactSet, on average, expect Discover to report earnings of $1.21 per share on $2.06 billion in revenue.

LAST YEAR'S QUARTER: After paying preferred shareholders, Discover posted net income of $621 million, or $1.21 per share, on revenue of $1.96 billion.

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