Discover Financial Services Inc. reported an increase in second quarter earnings as the credit card issuer had strong loan and revenue growth — and also warned analysts that it would pull back on its participation in the personal loan business amid concerns about the amount of industry competition and pricing.
Discover chairman and CEO David Nelms told analysts on the quarterly conference call late this afternoon that it planned to scale back origination in the personal loans business, citing heightened competition from FinTech companies and other firms as well as concerns about the volume of marketing collateral that they see chasing customers in this space.
In order to illustrate the problem, he said the industry sent more direct mail for personal loans in the first half of this year than it sent for credit cards, but the company noted that the personal loan market overall is only 15 percent of the size of the credit card market. He added that “industry pricing and credit standards seem to be focused more on near-term growth than long-term returns.”
The company reported a five percent increase in personal loans during the quarter to $349 million, while total loans were up 9 percent to $84.8 billion. The net charge-off rate in personal loans rose 79 basis points to 3.97 percent, compared with the year-ago period. This compared with a 40 basis point increase in the net charge-off rate for credit cards to 3.34 percent.
He said the company expects receivables in personal loans to be flat to down over the second half of the year.
The company said net income rose to $669 million, or $1.91 a share, compared with $546 million or $1.40 in the year-ago quarter.
Credit card loans grew 10 percent, or $6 billion, in the quarter to reach $67.8 billion, while sales volume in Discover card grew 9 percent, to $35.1 billion, from the year-ago quarter.
“Over time we’ve invested in brand advertising, in marketing analytics, in superior service and in enhancements to our rewards offerings,” he told analysts on the quarterly conference call. Together these investments continue to drive profitable loan and revenue growth from a balanced mix of new accounts and existing cardholders.”
In terms of the credit business, he said the company has maintained a disciplined approach to underwriting. He added that the company has seen meaningful benefit from its investments in advanced analytics, modeling and machine learning. He added that the strength of the U.S. economy has helped the company’s overall performance.
The company said the total net charge-off rate rose 40 basis points from the prior year to 3.11 percent. After excluding purchased credit-impaired loans, the company said the total net charge off rate increased 39 percent from the prior year to 3.18 percent and the total delinquency rate of 30 days or more rose 15 basis points from the year-ago period to 2.08 percent.
In addition, consumer deposits rose 12 percent, or $4.5 billion, to $42.3 billion.