Fitch Affirms Discover Financial Services Long-Term IDR at 'BBB'; Outlook Negative

Approximately $31.1 billion of deposits, debt, and preferred stock is affected by these actions. A complete list of ratings is detailed at the end of this release.

The affirmation reflects the sound credit and debit card franchises, solid liquidity, and strong capital levels for the assigned ratings, offset by a lack of revenue diversity, limited funding flexibility, intense industry competition, and recent legislative change impacting the credit card industry.

The downgrade of the Individual ratings reflect the expectation that core operating earnings will remain under pressure into 2010 as reserve levels continue to build in response to the rising unemployment rate. The Individual rating attempts to assess a bank's intrinsic creditworthiness absent any external support.

The Negative Outlook reflects Fitch's expectation that credit metrics will continue to deteriorate from current levels over the remainder of 2009 and into 2010 and that core operating profits will not be recorded until the latter part of 2010, at the earliest. Fitch recognizes that Discover's asset quality performance has performed relatively better than other large credit card issuers, given its slower growth in 2005 through 2007, its lower exposure to California and Florida, and its longer average customer relationships, but current unemployment expectations point to continued deterioration in credit card losses across the industry into 2010. As a result, Fitch expects provision expenses to be elevated for some time, and portfolio contraction and operating cost reductions may not be enough to offset a negative impact on capital ratios. Negative rating action will result from material reductions in capitalization, a deteriorating liquidity profile, and/or an inability to economically tap the ABS markets, given a significant amount of structured debt maturities in 2010.

Rating stability will be driven by an improvement in credit metrics, a return to positive and sustainable earnings performance, an ability to reduce reliance on the brokered deposits markets, and an ability to access the ABS markets within and outside the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF).

Fitch has affirmed the following with a Negative Outlook:

Discover Financial Services

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Short-term IDR at 'F2';

--Senior debt at 'BBB';

--Preferred stock at 'BB+'

--Support at '5'.

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'.

Fitch has downgraded the following with a Negative Outlook:

Discover Financial Services

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

Discover Bank

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

Fitch has assigned the following:

Discover Financial Services

--Support Floor 'NF'.

Discover Bank

--Support Floor 'NF'.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

SOURCE: Fitch Ratings

Fitch Ratings, New York 
Meghan Crowe, CFA, +1-212-908-9121 
Christopher D. Wolfe, +1-212-908-0771 
Media Relations: 
Brian Bertsch, +1-212-908-0549 
brian.bertsch@fitchratings.com