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Fitch Expects to Rate Discover Financial Service's Senior Notes 'BBB'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to rate Discover Financial Service's (Discover) $500 million of senior unsecured notes 'BBB'. The notes will be issued in association with a debt exchange for a like amount of Discover Bank's 8.70% subordinated debt maturing in 2019. The new notes will have a coupon of 3.85% and will mature in November 2022.

Fitch does not consider the transaction to be a coercive debt exchange. Instead, Fitch believes the issuance is an attempt to improve funding costs in the attractive capital markets environment and rationalize the bank's capital position under new Basel III guidelines.

RATING DRIVERS AND SENSITIVITES

Discover's Stable Rating Outlook reflects the expectation for earnings consistency, moderate portfolio growth, peer-superior asset quality, and the maintenance of strong liquidity and risk-adjusted capitalization. While Discover will reduce capital ratios to its targeted range over time, Fitch expects the bank to do this in a prudent manner.

Increased revenue diversity, proven competitive positioning and credit performance in non-card loan categories over time, enhanced funding flexibility and/or further clarity on regulatory and legislative issues, particularly as it relates to the student loan sector, could support positive rating momentum.

Conversely, a negative rating action could be driven by a decline in earnings performance, resulting from a decrease in market share or credit deterioration, a weakening liquidity profile, significant reductions in capitalization, and legislative and/or regulatory changes that alter the earnings prospects of the credit card and student loan businesses.

Negative rating momentum could also be driven by an inability of Discover to maintain its competitive position and earnings prospects in an increasingly digitized payment landscape. While the company is focused on strategic acquisitions and alliances to expand its online and mobile capabilities, competition from technology companies and social networks, with access to significant consumer data, is expected to intensify.

Discover is a leading credit card issuer and electronic payments company that authorizes, processes, and guarantees the settlement of cardholder transactions on the Discover, PULSE, and Diners Club networks, and extends credit on a revolving basis to Discover cardholders. The company had $59.2 billion in loan receivables at Aug. 31, 2012 and its stock is listed on the NYSE under the ticker symbol DFS.

Fitch expects to assign the following rating:

Discover Financial Services

--Senior Unsecured Debt 'BBB'.

Existing ratings for Discover are as follows:

Discover Financial Services

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

--Short-term IDR 'F2';

--Viability Rating 'bbb';

--Senior debt 'BBB';

--Preferred Stock 'B+'

--Support '5'; and

--Support Floor 'NF'.

Discover Bank

--Long-term IDR 'BBB';

--Short-term IDR 'F2';

--Viability Rating 'bbb';

--Short-term Deposits 'F2';

--Long-term Deposits 'BBB+';

--Subordinated Debt 'BBB-';

--Support '5'; and

--Support Floor 'NF'.

The Rating Outlook is Stable.

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

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Rating Criteria' (Aug. 15, 2012).

--'Finance and Leasing Companies Criteria' (Dec. 12, 2011).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834

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Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
Meghan.neenan@fitchratings.com
Fitch Inc.
One State Street Plaza New York, NY 10004
or
Secondary Analyst
Justin Fuller, CFA, +1 312-368-2057
Director
or
Committee Chairperson
Christopher Wolfe
Managing Director
Christopher.wolfe@fitchratings.com
or
Media Relations:
Brian Bertsch, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

Source: Fitch Ratings