By Andrew R. Johnson
The improving housing market has opened the door to a new line
of banking business for credit-card lender Discover Financial
Services (DFS)--home-equity loans.
The company, best known for its orange logo and cash-back credit
cards, plans to offer home-equity loans starting in the second half
of the year as it aims to benefit from rising home values and
continue its push beyond plastic.
Discover, which says about 80% of its customers are homeowners,
plans to offer fixed-rate, closed-end loans worth $25,000 to
$100,000, marketing initially to existing customers and eventually
expanding more broadly to other consumers.
Many banks in recent months have reported gradual increases in
home-equity lending, spurred by rising home values that have left
consumers with more equity to tap.
Such lending took a dive when the housing market crashed a few
years ago, wiping out the equity that borrowers had in their loans
as values plummeted. Several lenders retrenched from the market and
capped borrowers' ability to draw additional funds under existing
home-equity loans.
"My view is that in many places in the country, the housing
market is finally stabilizing," David Nelms, chairman and chief
executive of Discover, told investors and analysts Tuesday during
the company's annual financial meeting in New York. "I think that
there are people who do have equity in their homes, and it's a much
more careful time today than it was during the" 2005-2007 housing
market.
Home-equity loans would build on Discover's existing foray into
mortgage lending as it works to diversify beyond credit cards,
which generate the bulk of its revenue, and put excess capital to
work.
Last year, Discover launched a home-loan business that
originates mortgages online, using assets it acquired from Tree.com
Inc. (TREE). To date, that business has originated more than $2
billion mortgages, though it sells those loans rather than
retaining them on its balance sheet.
Discover executives said Tuesday they are open to making
additional acquisitions if they fit strategically with the company.
It also sees opportunities to return more capital to
shareholders.
"Looking forward we see room to increase our dividends and
anticipate share repurchases will continue to be an integral part"
of the company's capital strategy, Chief Financial Officer Mark
Graf said during a presentation. Last year Discover returned $1.4
billion to shareholders through dividends and share buybacks.
Home-equity loans could complement personal loans that Discover
markets to consumers as a debt-consolidation tool.
Discover caps those loans at $25,000, so home-equity loans could
address customers who are seeking larger amounts, Mr. Nelms
said.
Discover also offers private student loans as well as savings
accounts, CDs and checking accounts, which it recently rolled out
to select customers and plans to market to non-customers next year.
By far, credit cards remain the company's largest category,
totaling $51.1 billion last year compared with $7.8 billion of
student loans and $3.3 billion of personal loans.
Discover is one of the few credit-card lenders experiencing
consistent loan growth, which it says is due to share gains over
its competitors. The company on Tuesday forecast long-term
card-loan growth of 2% to 5%, up from a previous forecast of 2% to
4%.
Mr. Nelms said the rollout of mortgages last year and checking
accounts this year represent the last additions he feels are
necessary as Discover positions itself as a full-fledged bank that
can compete with larger financial institutions for customers.
"Now that we have those . . . all of the other potential
products are more nice-to-haves," Mr. Nelms said in an
interview.
Auto loans, store credit cards and brokerage accounts are
products Discover could offer in the future, "but it's more a
matter of . . . what makes the most sense to do as an extension,"
Mr. Nelms said.
Mr. Nelms noted Discover had a direct-to-consumer brokerage
business previously while it was part of Morgan Stanley (MS).
Discover was spun off of Morgan Stanley in 2007.
"It's something we're obviously pretty familiar with," Mr. Nelms
said, adding it's unlikely Discover would offer such products in
the near future.
Discover's shares were up 1% at $42.26 in recent trading. The
shares are up more than 9% this year.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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