Discover 2011 Annual Report Download - page 33

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Item 1A. Risk Factors
You should carefully consider each of the following risks described below and all of the other information in this annual
report on Form 10-K in evaluating us. Our business, financial condition, cash flows and/or results of operations could be
materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these
risks. This annual report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this annual report on Form 10-K. See “Special Note
Regarding Forward-Looking Statements,” which immediately follows the risks below.
Economic conditions have had and could have a material adverse effect on our business, results of operations, financial
condition and stock price.
While certain economic conditions in the United States have shown signs of improvement, economic growth has been
slow and uneven as consumers continue to be affected by high unemployment rates and depressed housing values. In addition,
recent concerns and events such as economic uncertainty surrounding financial regulatory reform and its effect on the revenues
of financial services companies, U.S. debt and budget matters and the sovereign debt crisis in Europe, may continue to impact
economic recovery and the financial services industry. A prolonged period of slow economic growth or a significant
deterioration in economic conditions would likely affect the ability and willingness of customers to pay amounts owed to us. A
customer's ability to repay us also can be negatively impacted by increases in their payment obligations to other lenders under
mortgage, credit card and other consumer loans. Although delinquencies and charge-offs declined significantly in 2011, we
believe that we are experiencing historical lows in these rates and that they are likely to increase. In addition, if economic
conditions do not improve, these rates may increase more than expected. The over 30 days delinquent rate was 2.30% at
November 30, 2011, down from 3.89% at November 30, 2010, and the full-year net charge-off rate was 3.99% for 2011, down
from 7.57% for 2010.
As our delinquency and charge-off rates rise, we expect to increase our allowance for loan losses. Due in part to
improvements in certain economic indicators, our provision for loan losses has declined substantially, to $1.0 billion for the
2011 fiscal year, as compared to $3.2 billion for the 2010 fiscal year. Lower levels of delinquency and charge-offs reduced our
reserve requirements and led to reserve releases in 2011, which significantly contributed to our net income growth. Growth in
our loan portfolio, along with stagnant or worsening economic conditions, would contribute to rising delinquency and charge-
offs and increases in our allowance for loan losses, which could negatively impact our net income.
Our business is always influenced by economic conditions. Poor economic conditions not only affect the ability and
willingness of customers to pay amounts owed to us, increasing delinquencies, charge-offs and allowance for loan losses as
described above, but can also reduce the usage of our cards and the average purchase amount of transactions on our cards,
which reduces our interest income and transaction fees. We rely heavily on interest income from our credit card business to
generate earnings. Our interest income from credit card loans was $5.7 billion for the 2011 fiscal year, which was 80% of
revenues (defined as net interest income plus other income), compared to $5.8 billion in the 2010 fiscal year, which was 88% of
revenues.
Economic conditions may also cause our earnings to fluctuate and diverge from expectations of securities analysts and
investors, who may have differing assumptions regarding their impact on our business and, therefore, may impact the trading
price of our common stock.
The regulatory environment for the financial services industry is being significantly impacted by financial regulatory
reform initiatives, which may adversely impact our business, results of operations and financial condition.
The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Reform Act”) contains a comprehensive set of
provisions designed to govern the practices and oversight of financial institutions and other participants in the financial
markets. The Reform Act addresses risks to the economy and the payments system posed by large systemically significant
financial firms, including us, through a variety of measures, including increased capital and liquidity requirements, limits on
leverage, and enhanced supervisory authority. The Reform Act also establishes a new financial industry regulator, the
Consumer Financial Protection Bureau (“CFPB”), and includes new requirements for debit card transactions, which impact our
core businesses and are described in more detail below. Our banking regulators have introduced and continue to introduce new
regulations and supervisory guidance and practices in response to the heightened Congressional and regulatory focus on
financial services generally, increasing their scrutiny over us and the industry. Also, additional legislative or regulatory action
that may impact our business may result from the multiple studies mandated under the Reform Act. We are unable to predict the
nature, extent or impact of any additional changes to statutes or regulations, including the interpretation or implementation
thereof, which may occur in the future.
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