NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Discover Financial Services (Discover) and Discover Bank at 'BBB'. Fitch has also upgraded the entities' Individual ratings to 'B/C' from 'C'. The Rating Outlook has been revised to Stable from Negative. Approximately $40.3 billion of debt and deposits are affected by these actions. A complete list of ratings is detailed at the end of this release.

The ratings affirmation reflects Discover's sound credit card franchise and growing payment services business, solid liquidity profile, strong capital levels, and reduced reliance on brokered deposits for funding. Rating constraints include a lack of revenue diversity, limited funding flexibility, intense industry competition, and heightened legislative and regulatory scrutiny of the credit card industry.

The Outlook revision reflects Discover's ability to generate earnings and build capital in 2009 and early 2010 despite the challenging economic and capital markets environment. Fitch believes core earnings will improve in 2010, even with the $305 million reserve build recorded in the first quarter, as credit metrics appear to have turned a corner and cost containment initiatives remain successful. Net charge-offs declined to 7.97% in the second quarter of 2010, from 8.51% in the prior quarter, which is the first sequential quarter improvement since the third quarter of 2007. Delinquencies of 30 days or more improved for the second consecutive quarter, reaching 4.52% at May 31, 2010, compared to 4.87% a year earlier. Improving credit trends yielded a $277 million reserve release in the second quarter which combined with reduced operating expenses to produce significant improvement in year-over-year core operating results.

Discover's capital ratios continue to compare favorably to similarly rated peers. Tangible common equity (TCE) as a percent of tangible managed assets was 9.06% at quarter-end, which is down from 9.46% at year-end 2009, but up from 8.14% at Feb. 28, 2010, which included a $1.3 billion equity charge associated with the consolidation of off-balance-sheet assets. Fitch expects the TCE ratio to improve further over the balance of the year as earnings generation exceeds dividend payments and asset growth. Additionally, regulatory capital ratios are solid, even with the repayment of the $1.2 billion TARP preferred investment in the quarter, and remain meaningfully above well-capitalized minimums.

The company's liquidity profile is strong, with a $10.9 billion liquidity portfolio, a $2.4 billion revolving credit facility, $3.5 billion of un-drawn conduit capacity, and $6.2 billion of Federal Reserve discount window capacity versus $15.6 billion of debt maturities over the next 12 months, including deposits, unsecured debt, and asset backed security (ABS) debt.

From a funding perspective, Discover has been successful at reducing reliance on brokered deposits by more than doubling its amount of direct-to-consumer deposits over the last 12 months. Still, Fitch believes the company's funding profile is not as flexible as larger regional banks with significant branch deposit bases, which are believed to be stickier than deposits originated through direct-to-consumer and brokered channels. Fitch would view further funding flexibility positively, with further reductions in brokered CDs and continued access to the ABS markets.

The recognition of material losses, absent non-recurring items, a weakening liquidity profile, reduced funding flexibility, and/or notable reductions in capitalization, as measured by tangible equity ratios, could result in negative rating action. Conversely, increased revenue diversity, sustainable positive credit trends, improved earnings consistency, and enhanced funding flexibility could support positive rating momentum.

The upgrade of the Individual ratings reflects an improving operating environment, as evidenced by a stabilization in unemployment and a turn in the company's credit metrics, which should yield growth in core profitability, and Discover's ability to retain solid balance sheet integrity throughout a difficult credit environment and in the face of regulatory change requiring the consolidation of off-balance-sheet assets. The Individual rating measures a bank's intrinsic creditworthiness absent any external support.

These rating actions reflect the application of Fitch's current criteria which is available on Fitch's website at www.fitchratings.com and specifically includes:

-- 'Global Financial Institutions Criteria', dated Dec. 29, 2009;
-- 'Bank Holding Companies', dated Dec. 30, 2009;
-- 'Finance and Leasing Companies Criteria', dated Dec. 30,

2009.

Fitch has affirmed the following with a Stable Outlook:

Discover Financial Services

-- Long-term Issuer Default Rating (IDR) at 'BBB';
-- Short-term IDR at 'F2';
-- Senior debt at 'BBB';
-- Support at '5';
-- Support Floor at 'NF'.

Discover Bank

-- Long-term IDR at 'BBB';
-- Short-term IDR at 'F2';
-- Short-term Deposits at 'F2';
-- Long-term Deposits at 'BBB+';
-- Support at '5';
-- Support Floor at 'NF'.

In addition, Fitch has upgraded the following:

Discover Financial Services

-- Individual to 'B/C' from 'C'.

Discover Bank

-- Individual to 'B/C' from 'C'.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

CONTACT:

Fitch Ratings
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
Meghan (Crowe) Neenan, CFA, +1-212-908-9121 (New York)
William A. Artz, +1-312-368-3178 (Chicago)

KEYWORDS:   United States  North America  New York

INDUSTRY KEYWORDS:   Professional Services  Banking  Finance

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