June 1, 2009
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News: Moody Slashes Discover's Rating
The economic recession hasn't finished with the financial industry yet. Credit card defaults continue to rise pushing harder and harder down on lenders' profits. Discover Financial Services is no exception. The Riverwoods, Illinois based credit card company recently experienced an investment downgrade by Moody's Investors Service. On Monday, Moody cut Discover Financial Services' unsecured debt rating to a Bal, their highest non-investment grade from a Baa3. The Bal rating in essence says that the company has questionable credit quality. According to Moody, the reason for the cut was due to Discover's high credit card losses. Future predictions were not any better as Moody speculated that Discover Financial would continue to experience rising defaults and loan losses. Additionally, Moody slashed the senior unsecured rating of the Discover Bank from Baa2 to a Baa3. Discover Bank, a wholly owned subsidiary of Discover Financial Services remains in the investment grade; however, is only one step above the junk category.
Discover Financial Services is a one of the U.S.'s leading credit card issuer and electronic payment services company. The well known Discover Network offers a variety of cards, student loans, certificates of deposit, and money market accounts. Discover was the first credit card company to offer cash rewards and round the clock customer service. According to Moody, the recession played a significant role in reducing Discover's financial flexibility by inhibiting its access to funding in the securitization market. Most recently, the company has become more reliant on brokered deposits. Furthermore, Discover's lack of diversity is expected to add to continued difficulties as a result of the recently approved legislation that is due to go into effect by February 2010.
Discover is not alone in the credit card default arena. In the wake of a recession, high unemployment rates, and a weak economy, all banks have been feeling the pains of the credit crisis. The crisis which is not over yet, began with the housing and mortgage crash and has lead to record breaking unemployment rates and loan defaults. Experts are saying that although we expect to see even higher numbers of defaults throughout the year, little rays of sunshine are peeking through the clouds.