Morningstar DBRS Places Discover Financial Services’ Credit Ratings Under Review Positive; Long Term Issuer Rating at BBB (high)

DBRS, Inc. (Morningstar DBRS) placed the credit ratings of Discover Financial Services (Discover, or the Company) and its banking subsidiary, Discover Bank (the Bank), including the Company’s Long-Term Issuer Rating of BBB (high), Under Review with Positive Implications. The credit ratings actions follows the announcement that Capital One Financial Corporation (Capital One, rated A (low) with Stable trend) has agreed to acquire Discover.

KEY CREDIT RATING CONSIDERATIONS
The Under Review with Positive implications reflects Morningstar DBRS’s view that Discover will benefit from merging with Capital One, a more highly rated financial institution. The integration with Capital One is expected to result in efficiencies and economies of scale along with the benefits of a more diversified business model and a larger financial institution. The Company’s funding profile is expected to benefit from Capital One’s solid deposit franchise.

Further, Capital One expects to capitalize and further expand on the Company’s proprietary “closed loop” network which could eventually lead in a higher market share in U.S, credit card and debit card payments. While the proposed acquisition entails integration risk, such risk could be moderated by the similarity of their core loan portfolios as well as by Capital One’s track record of successfully integrating acquired companies. Morningstar DBRS expects to conclude the review upon the expected close of the transaction in late 2024 or early 2025.

CREDIT RATING DRIVERS
If the acquisition of the Company closes as expected, the credit ratings would be equalized with Capital One’s. Conversely, if the acquisition of the Company by Capital One does not close, the credit ratings would likely revert back to Stable.

Franchise Combined Building Block (BB) Assessment: Good/Moderate

Earnings Combined Building Block (BB) Assessment: Strong/Good

Risk Combined Building Block (BB) Assessment: Good/Moderate

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate

Capitalization Combined Building Block (BB) Assessment: Good

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/428404.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
General Considerations
There were no Environmental (E) or Governance (G) factors that had a significant or relevant effect on the credit analysis.

Social (S) Factors
The Social factor and specifically the Product Governance subfactor, is a relevant factor in the credit analysis, but it does not affect the ratings or the trend assigned to Discover. Recently, in September 2023, the Federal Deposit Insurance Corporation (FDIC) issued a consent order to Discover Bank which addresses shortcomings in Discover Bank’s compliance management system for consumer protection laws and related matters. As part of the consent order, Discover Bank has agreed to improve its consumer compliance management system and enhance related corporate governance and enterprise risk management practices, and increase the level of Board oversight over such matters. The latest consent order does not contain any monetary penalties or fines. Further, in July 2023, the Company disclosed that beginning in 2007, it incorrectly classified certain credit card accounts into its highest merchant and merchant acquirer pricing tier. The misclassification affected pricing for certain merchants and merchant acquirers, but not for cardholders and the Company has recorded a liability of $376 million as of 3Q23. The S factor(s) have changed from the prior credit rating disclosure to reflect the aforementioned recent developments.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 22, 2023): https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (January 23, 2024) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar, Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

Morningstar DBRS did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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