Discover Financial profit dives 68% on compliance costs

NEW YORK: Discover Financial Services, the lender that agreed to be acquired by Capital One Financial Corp in the year’s biggest announced deal, posted a sharp drop in first-quarter profit as it worked to address compliance and risk-management deficiencies.

Net income plunged 68% to Us$308mil, or US$1.10 a share for the three months ended March 31, Riverwoods, Illinoisbased Discover said Wednesday in a statement. That missed the US$2.96 average estimate of analysts surveyed by Bloomberg.

Capital One chief executive officer Richard Fairbank predicted in February, shortly after announcing the Us$35bil deal to create the largest US credit-card issuer by loan volume, that the time and expense needed to fix Discover’s regulatory challenges would be high. The acquisition, subject to antitrust reviews and shareholder approvals, is expected to be completed late this year or in early 2025.

Discover’s first-quarter operating expenses surged 67% to Us$2.31bil.

In another sign of increased stress for US consumers, the firm reported that credit-card loans at least 30 days overdue climbed 54% to Us$3.81bil from a year earlier, while those at least 90 days delinquent rose 61%. Earlier this month, the US Federal Reserve Bank of Philadelphia said in a report that card delinquency rates in the fourth quarter were the highest since at least 2012.

Shares of Discover advanced 1.3% to US$121.40 in extended trading at 5:02pm in New York. The stock had climbed 6.7% this year through the close of regular trading.

Net revenue for the quarter totalled Us$4.21bil, a 13% increase from a year earlier, beating Wall Street’s average estimate of Us$4.07bil.

In July, Discover said it misclassified certain credit-card accounts, resulting in merchants being overcharged, and halted stock buybacks. The lender received a proposed consent order from the Federal Deposit Insurance Corp for a separate consumer compliance issue.