Magazine article American Banker

Discover's CFO Cites 'Global' Liquidity Issues

Magazine article American Banker

Discover's CFO Cites 'Global' Liquidity Issues

Article excerpt

Though failing to securitize $500 million of U.K. card receivables last quarter has been the most "pointed" consequence of the credit crunch for Discover Financial Services LLC so far, the company says it is girding itself against a global storm.

"We didn't see the issue in the U.S. as acutely as we saw it in the U.K.," Roy A. Guthrie, Discover's chief financial officer, said in an interview Tuesday, the day his company reported results for its fiscal third quarter, which ended Aug. 31. However, "it really was a global situation that was unfolding, and we took measures that we thought were appropriate, given that 50% of our funding is sourced from the U.S. capital markets, to shore liquidity up in an abundance of caution."

The increased liquidity is a "preventative insurance policy" against an uncertain future, Mr. Guthrie said.

Discover increased cash reserves to over $8 billion as of Aug. 31, a two-thirds boost over what it had when it spun off from Morgan Stanley at the end of June.

It blamed much of its 16.22% drop in earnings from a year earlier, to $202.2 million, on higher credit provisions, driven by a $17 million set-aside for the $500 million portfolio Discover was forced to put back on its books, as well as funding costs at its international card business.

"We've seen very little credit card" asset-backed securities "issuance in the last few weeks," Mr. Guthrie said on a conference call Tuesday. "And clearly the issuance that has cleared the market has been at significantly wider spreads."

Discover added liquidity mainly by raising deposits at its banking operations. It said it enlarged its distribution groups to three partners for its certificate of deposit accounts, and to five partners for its money market accounts.

In the interview, Mr. Guthrie elaborated on the growth potential at Discover's payment networks. …

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