TEXT-Fitch expects to rate Discover Financial preferred issuance 'B+'
Oct 12 - Fitch Ratings expects to rate Discover Financial Service's (Discover) non-cumulative perpetual preferred stock issuance 'B+'. The preferred issuance will be callable after a period of five years and will be structurally subordinate to subordinated debt. Proceeds are expected to be used for general corporate purposes, which may include advances to subsidiaries, repayment of indebtedness, and/or share repurchases. Fitch expects to assign the issuance 100% equity credit. RATING DRIVERS AND SENSITIVITIES 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, 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 for 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 --Preferred Stock 'B+-'. 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'; --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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and(New York Ratings Team)
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