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December 18, 2007

Discover’s Goldfish founders

The US credit card business said the non-cash impairment charge would be equal to all or substantially all of the goodwill and other intangible assets of its Goldfish business.David Nelms, CEO of Discover, said: We have concluded that continued disruption in the UK financial markets, higher interest rates and our decision to reduce our loan exposure to the UK market have negatively affected the book value of our Goldfish business.Morgan Stanley, which spun off Discover earlier this year, acquired Goldfish in February 2006 for $1.6 billion

By Verdict Staff

Discover Financial Services is to write down up to $422 million of assets in its Goldfish credit card business because of difficult conditions in the UK financial markets. The US credit card business said the non-cash impairment charge would be equal to “all or substantially all” of the goodwill and other intangible assets of its Goldfish business.

David Nelms, CEO of Discover, said: “We have concluded that continued disruption in the UK financial markets, higher interest rates and our decision to reduce our loan exposure to the UK market have negatively affected the book value of our Goldfish business.”

Morgan Stanley, which spun off Discover earlier this year, acquired Goldfish in February 2006 for $1.6 billion. Discover said efforts to refocus the business had started to produce results, despite the challenging business environment. Goldfish is part of Discover’s international business, which made a £67 million ($137 million) pre-tax loss in the third quarter.

Nelms added: “We will continue implementation of significant actions to improve the performance of our UK business.”

Risk management pays off

Nelms said the company’s risk management had been paying off, and charge-offs in the US card segment were expected to remain below 4 percent in the fourth quarter.

Sanjay Sakhrani, an analyst at securities broker and investment bank Keefe, Bruyette & Woods, told CI: “The company [Discover] believes its ability to significantly cut the losses in the international Goldfish segment is very high given that within the year-to-date loss (of roughly $173 million pre-tax) there are about $45 million of one-time items on the negative side. Credit quality has stabilised and expense reduction initiatives are under way.

“Discover Financial Services also announced plans to write off substantially all of the goodwill and intangibles related to its UK credit card operations, which totals about $422 million. While this was not a positive, we believe the impairment charge was not unexpected given the recent under-performance of the UK card business due to higher bankruptcy filings.”

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