Discover 2Q11 financials: leading indicators for other credit card issuers

Discover Financial posted second quarter 2011 financials this morning.  As Discover reports quarterly financials a month before other leading card issuers, we look to its financials to get an early read on broader trends in the credit card industry

The following summarizes some key credit card metrics in Discover 2Q11 financials:

  • Charge-off rate: continued to improve, with a decline of 95 bps in the quarter to 5.01%
  • Delinquency rate: the 30+ day delinquency rate fell 80 bps to 2.79% (Discover reported this as an all-time low)
  • End-of-period loans: fell 1% y/y, but this decline is tailing  off (y/y was was 3% in 1Q11)
  • Volume: Discover Card sales volume rose 9% y/y, while total Discover Card volume grew 11%

Discover does not break out revenue and provision for loan loss figures for its credit card operations, but rather reports them for the total company.

  • Net interest income: rose 4% y/y, with a 1% rise in interest income, and a 6% fall in interest expense
  • Other income: increased 6% y/y, driven in part by a 16% rise in loan fee income
  • Provision for loan losses: fell 76% y/y to $176MM

In summary, we are seeing a continuation of recent trends: improvement in credit quality metrics; spending but no loan growth; and profitability driven by lower provisions for loan losses, rather than revenue growth.

However, with charge-off rates now close to 5% and 30+ day delinquency rates at an all-time low, Discover is shifting its focus to growing outstandings.  It reported that the decline in outstandings is bottoming out, and it anticipates growth in the coming quarters. And to push this growth, Discover grew marketing spend 27% y/y in 2Q11.

However, issuers’ interest in growing outstandings is limited by continued weak consumer demand.  This is leading to some issuers to looking to acquire card portfolios (e.g., Capital One’s recent private-label portfolio acquisitions, and its bid for HSBC’s U.S. card portfolio), or refocusing attention on acquiring non-card loan portfolios (note Discover’s own recent acquisitions of Tree.com’s Home Loan Center, as well as its earlier acquisition of The Student Loan Corporation from Citigroup).

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