Fed Consumer Credit Report Lifts Discover's Prospects


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The Federal Reserve recently released its consumer credit report a couple of weeks ago which shows that the US consumers increased their total debt by $6.3 billion in the month of April 2011, an increase of just over 3% sequentially.  It was the seventh consecutive rise in consumer credit and about a $1 billion more than the predicted increase by the Wall Street economists. The Fed's data shows that there was a 5.3% increase in non-revolving debt, which typically includes student loans and car loans. This can be particularly encouraging for Discover Financial ( DFS ) who is a dominant player in the student loan market, as well as other financial firms like Capital One ( COF ), American Express ( AXP ), Visa (NYSE:V) and MasterCard (NYSE:MA).

While there was a just north of a 5% increase in non-revolving debt, revolving debt (like credit card debt) decreased by 1.4% during April which indicates that higher borrowing is a result of economic hardship rather than economic rebound. In tough economic times with high unemployment rate, people prefer to go back to school to improve skills. A decline in revolving credit also indicates that people remain reluctant to incur credit card debts especially when the prices of food and gasoline are on the rise.

An increase in the demand for student loans will help Discover improve its student and personal loan portfolio which stood at $4.3 billion in 2010 and, according to our estimate, this will increase to $5.1 billion this year and around over $15 billion by the end of our forecast period.

See our full analysis of Discover Financial

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
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