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Tickers in this Article: DFS, COF, AXP, JPM, C, BAC
Discover Financial Services (NYSE:DFS) posted a loss in its latest earnings report. The credit card company announced a few days ago that a loan loss reserve would reduce profits. The credit card industry recently reported declining or stable delinquency rates, so the business climate for Discover and other card issuers is improving.

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Have Credit Card Losses Peaked?
The recent numbers on credit card delinquencies for February improved for most major lenders. Discover saw a drop to 5.5% from 5.55%, though its charge-off rate rose to 9.11% from 8.58%. Capital One (NYSE:COF) slashed its delinquencies to 5.51% from 5.8% in January, while its charge-offs dropped to 10.19% from 10.41%.

American Express (NYSE:AXP), the largest card issuer, forecast lower write offs. For the big banks, JP Morgan (NYSE:JPM) substantially lowered its charge-offs and reduced its delinquencies.

Citigroup (NYSE:C) had both its delinquencies and its charge-offs increase month over month, the only major credit card issuer to do so. Bank of America (NYSE:BAC), though it had an improvement in delinquencies, still had the highest numbers in both categories. Its delinquency rate is at 7.23% and its charge-offs are at 13.51%.

Revenue, Rates, Fees And Loan Loss Provisions
Many credit card lenders raised rates last year, in part leading to the hefty charge offs this year. Card issuers attempted to re-configure their income model in anticipation of the new consumer law which went into effect in February. The lenders raised rates, closed accounts and charged new fees. How well the companies have avoided a hit on their top line revenue will be clearer going forward, but FICO suggests that within three years, the average card will generate "less than $100 a month in revenue, down from $200 a month before the law."

And while profits fell from $19 billion for the top twelve issuers in 2007 to $6.32 billion in 2008, profits are still on the horizon for most companies, just not outsized ones.

Discover's Quarter
The Discover provision for loan loss reserve of $305 million this quarter contributed to the $104 million loss in net income, or minus 22 cents a share, compared to a profit last year's same quarter of $120 million or 25 cents a share. Though analyst projections for Discover vary widely, consensus earnings estimates for the company for the current year 2010 are 68 cents a share, with $1.36 in 2011. So this quarter's loss should not impede Discover's profitability overall. The company also announced it will be buying back the $1.2 billion in preferred shares, the TARP funds it received.

The Year Ahead
If there are no write-offs or giant financial mishaps in the next year such as the economy falling back into a deep recession, and there shouldn't be as the economy stabilizes, Discover should sustain its trend of profitability. The stock is currently trading at over $15 a share, which would give it a PE of 22.5 at this year's projected earnings, but a more reasonable multiple of 11.2 for 2011.

Give this stock time to settle down to a better price and let the earnings catch up a bit before you consider buying it. (Read Analyzing a Bank's Financial Statements to learn more tools to enhance your financial analysis.)

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