Discover 1Q11 financials illustrate continued recovery for card issuers

Discover Financial typically reports quarterly financials one month before other leading U.S. credit card issuers. As such, its results are seen as provider leading indicators of the overall health of the credit card industry.

Discover reported 1Q11 financials on March 22. The following highlights from its results show that leading credit card issuers continue to recover following the crisis that impacted the industry in the second half of 2008. Note the following trends for some key credit quality metrics:

  • The net principal charge-off rate fell 304 bps y/y and 99 bps q/q to 5.96% (crucially, the charge-off rate is below 6% for the first time since the fourth quarter of 2008)
  • The 30+ day delinquency rate fell 180 bps y/y and 47 bps q/q to 3.59% (this is the lowest rate since the fourth quarter of 2007)

With credit quality now returning to more normalized levels, is Discover shifting its focus towards growth?  The 1Q11 results provide some contradictory evidence:

  • End-of-period credit card loans were down 3% year-over-year (y/y), with Discover attributing the decline to a higher payment rate on the part of cardholders.  However, the rate of credit card loan decline is slowing (y/y decline of 6% in 3Q10 and 5% in 4Q10).  And Discover’s CEO said that he expects credit card loans to growth in the second half of 2011
  • Discover card sales volume rose 7% y/y to $24.0 billion
  • Marketing and business development spending rose 60% year-over-year to $136 million in 1Q11 (due to seasonality in marketing spend patterns, quarterly trends are typically not very useful

So, there is evidence that Discover is investing for growth, but that it will continue to be conservative with regard to lending, and will aim to have a balance of spending and lending growth.