Citing an overall slowdown in consumer spending, Discover Financial Services today reported net income of $370.7 million for its fourth fiscal quarter ended Nov. 30, down 14.2% from $432.3 million during the same period a year ago. The results included $472 million Discover received from Visa Inc. and MasterCard Worldwide as the final payments of their $2.75 billion combined antitrust litigation settlement reached last year with Discover. Discover claimed in a 2004 civil lawsuit that the card networks’ exclusionary rules hurt its growth. Revenue during the quarter net of interest expense was $1.58 billion, down 20.2% from $1.98 billion. Discover’s U.S. Card unit posted a slight decline in sales volume during the quarter, to $21.9 billion from $22 billion, which the company attributed to the ongoing effects of the recession. Managed loans fell slightly to $50.9 billion from $50.9 billion a year earlier. Discover’s managed net charge-off rate on credit card receivables rose 295 basis points, to 8.43% from 5.48%. The delinquency rate on loans at least 30 days past due was 5.31%, up 75 basis points from 4.56%. The company’s provision for loan losses fell 10%, to $989 million from $1.1 billion a year earlier. Total third-party payments segment volume fell 1.8%, to $33.4 billion from $34 billion. Volume for Discover’s Pulse PIN-debit network dropped 1.2%, to $24.7 billion from $25 billion, while volume from third-party Discover card issuers fell 1.2%, to $1.52 billion from $1.54 billion. Total transactions processed on the Pulse network rose 5%, to 677 million from 644 million. Diners Club International volume totaled $7.1 billion, down 5.3% from $7.5 billion. During a conference call today with analysts, Discover Chairman and CEO David Nelms said Discover is “not prepared to suggest that losses have peaked,” and he expected the company to report higher charge-offs early in 2010. Discover is beginning to see the first bottom-line effects of the Credit Card Accountability, Responsibility and Disclosure Act President Obama signed into law last May, as the company resets customers’ interest rates to cope with a ban on risk-based pricing, Nelms added, and as a result he expects Discover’s portfolio-yield to decline somewhat next year. “Effectively, risk-based pricing is being unwound, with pricing being pushed more toward the middle (range) of (previously higher) interest rates for a broad group of people,” Nelms said. Discover also has bumped up its advertising and marketing efforts this quarter, while heavily pushing its cash-back rewards program in TV spots, he said. “I’ve seen significant pull-backs (of some issuers) switching (rewards programs) from cash to points, but we’ve done the opposite,” Nelms said.

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