©2007 Discover Financial Services Investor Presentation June 2007 Exhibit 99.1 |
2 ©2007 Discover Financial Services Notice The following slides are part of a presentation by Discover Financial Services (the "Company") and are intended to be viewed as part of that presentation. The presentation is based on information generally available to the public and does not contain any material, nonpublic information. No representation is made that the information in these slides is complete. The presentation has been prepared solely for informational purposes, is neither an offer to sell nor the solicitation of an offer to buy any security or instrument and has not been updated since originally presented. The information provided herein may include certain non-GAAP financial measures. The reconciliation of such measures to the comparable GAAP figures are included in the Company’s Registration Statement on Form 10, as amended, which is on file with the SEC. The presentation contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s estimates, projections, expectations or beliefs at that time and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of certain risks and uncertainties that may affect the future results of the Company, please see "Special Note Regarding Forward-Looking Statements," "Risk Factors," "Business - Competition," "Business – Regulatory Matters" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Information Statement that is included as part of its Registration Statement on Form 10, as amended, which is on file with the SEC. The historical financial information included in the presentation has been derived from Morgan Stanley’s consolidated financial statements and does not necessarily reflect what our financial condition, results of operations or cash flows would have been had we operated as a separate, stand-alone company during the periods presented. |
3 ©2007 Discover Financial Services David W. Nelms CHIEF EXECUTIVE OFFICER Roger C. Hochschild PRESIDENT AND CHIEF OPERATING OFFICER Roy A. Guthrie EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER Today’s Agenda • Transaction Summary • Business Overview and Strategy • Financial Overview • Q & A |
4 ©2007 Discover Financial Services Transaction Summary Listing: NYSE: DFS Distribution Ratio: 1:2 March 31 Shares Outstanding (1) : 478 million Distribution Timeline Record Date: 6/18 Distribution Date: 6/30 Regular Way Trading Date: 7/2 Note: (1) Based on number of shares of Morgan Stanley common stock outstanding as of March 31, 2007. For purposes of EPS calculations, a substantial portion of the following additional equity awards of DFS stock needs to be included: (i) Conversion of Morgan Stanley restricted stock units and options held by active Discover employees, (ii) Stock issued to Discover executive officers and other employees in connection with distribution, (iii) Stock issued to directors. |
5 ©2007 Discover Financial Services Business Overview and Strategy |
6 ©2007 Discover Financial Services Investment Highlights • Unique franchise – a leading independent card issuer and payments network • U.S. card is a high margin, strong cash flow generator that is well positioned for growth • Expanding payments business • Opportunity to turnaround U.K. credit card business • Extending direct financial services that leverage brand, capabilities and large customer base • Well positioned to be stand alone company – Solid financial track record and capital position – Seasoned management team |
7 ©2007 Discover Financial Services 4 7 9 13 18 24 29 34 38 43 46 51 59 69 72 74 77 80 86 97 1 Department of Justice Ruling PULSE Acquisition Third Party Issuers and Acquirers Discover History Discover Launch • No Annual Fee • Cashback Bonus • New Network • 24/7 Customer Service U.K. Card Launch Goldfish Acquisition (U.K.) DWD IPO out of Sears Merger with Morgan Stanley Credit Card Sales ($Bn) |
8 ©2007 Discover Financial Services Seasoned Management Team 2000/Citi EVP, Discover Network Harit Talwar 2003/American Express SVP, Chief Credit Risk Officer James V. Panzarino 1998/MBNA EVP, Chief Technology Officer and PULSE Network Diane E. Offereins 2001/American Express EVP, Cardmember Services and Consumer Banking Carlos Minetti 2004/Morgan Stanley SVP, International Charlotte M. Hogg 2004/McKinsey EVP, Chief Marketing Officer Mary Margaret Hastings Georgiadis 1999/Morgan Stanley SVP, General Counsel and Secretary Kathryn McNamara Corley 2005/Citi EVP, Chief Financial Officer Roy A. Guthrie 1998/MBNA President and Chief Operating Officer Roger C. Hochschild 1998/MBNA Chief Executive Officer David W. Nelms DFS Start/Previous Employer Title Name |
9 ©2007 Discover Financial Services Card Issuing Credit Debit Discover American Express Visa MasterCard First Data Metavante Citi Bank of America JPM Chase Capital One Payments Networks Unique Business Model • One of two card issuers that operates a U.S. payments network – only one with both credit and debit capabilities • Discover’s network has supported the card issuing business through: – Building Discover brand – Joint promotions with merchants – Operational efficiencies • Advantages in payments: – Broad offering for issuers (credit, PIN and signature debit) – Leveraging largely fixed cost network |
10 ©2007 Discover Financial Services • U.K. cards issued by Goldfish bank – 2MM cardmembers – $4.6Bn receivables – Operating on MasterCard and Visa networks • PULSE and Discover Network third-party payments business – 4,400+ financial institutions – 1.9Bn+ transactions • Discover cards issued on Discover Network – 6 th largest issuer – 50MM cardmembers – $45.7Bn receivables – 4MM+ merchants International Card Third Party Payments U.S. Card $5.7Bn Revenues (1) $1.6Bn PBT $112MM Revenues (1) $29MM PBT $405MM Revenues (1) ($87MM) PBT Note: (1) Sum of Net Interest Income and Other Income Business Segments 2006 Results |
11 ©2007 Discover Financial Services • Second largest credit card market • High industry credit losses challenging issuer profitability • Regulatory actions adversely impacting interchange and card fees • Strong volume growth especially debit • DOJ Ruling • MasterCard and Visa convert to “for profit” • New markets and technology • Large mature market with modest growth • Industry consolidation has occurred • Growing importance of brand and rewards • Sophisticated marketing and risk management U.K. Cards Payments U.S. Cards Grow U.S. Loans and Profits Expand Payments Business Turn Around U.K. Business Market Dynamics and Strategic Priorities Strategic Priorities |
12 ©2007 Discover Financial Services U.S. Card |
13 ©2007 Discover Financial Services 9% 23% 38% 16% 5% 8% 7% 36% 22% 18% 29% 12% 39% 71% 73% 55% 59% 80% Discover AMEX BofA Citi JPM Chase Cap One Notes: (1) 2006 TNS Consumer Card Strategies Research Program (2) Master Trust Balances as of 1Q07 (3) Excluding Discover and American Express <2 Years 2 - 5 Years > 5 Years 62% 44% 89% 56% 40% 76% Income >50K College Graduates Home Ownership Demographic Profile (1) Portfolio Tenure (2) Discover Other Issuers Attractive and Stable Cardmember Base • Attractive cardmember demographics versus average issuer – Higher income – More educated – Greater home ownership • High cardmember loyalty – Tenure longer than industry average – Attrition half industry average (3) • Cardmember base provides platform for strong credit performance and cross-sell |
14 ©2007 Discover Financial Services 30+ Day Managed Delinquency Rate (1) Notes: (1) Discover fiscal year, all others calendar year (2) U.S. Card; company filings (3) Card Services; company filings (4) 2003 combined BofA (Consumer Credit Card) and MBNA (Credit Card Loans), 2004-2005 North American Card Pro Forma, 2006-1Q07 U.S. Consumer and Business Card; company filings Discover JPM Chase (3) Capital One (2) BofA (4) 0% 1% 2% 3% 4% 5% 6% 7% 2003 2004 2005 2006 1Q07 Strong Credit Quality • Since 2003, enhanced credit policies and practices – Tightened underwriting standards – Enhanced account management – Leveraged state-of-the-art databases and analytic tools • Strong credit quality – Lowest 30+ day delinquency rate in 10 years – Loan loss trends in line with leading issuers • Continue focus on maintaining strong credit quality |
15 ©2007 Discover Financial Services Unaided Brand Awareness (1) 63% 62% 67% 69% 28% 25% 23% 15% Visa MC AMEX Discover Cap One Citi JPM Chase BofA Note: (1) GfK Arbor, January 2007 2006 Brandweek Winners Leading Brand • Discover is one of the leading brands in financial services – Superior to bankcard issuers and comparable to networks – Billions of consumer impressions at point-of-sale • Only company to win Brandweek’s “Customer Loyalty Award” 10 years in a row • Strong brand creates distinctiveness in saturated card market, positively impacting new account acquisition |
16 ©2007 Discover Financial Services Direct Mail Online Telemarketing Other 2006 New Accounts by Channel (1) 20% 54% 11% 15% Diversified Acquisition Channels • While direct mail remains largest acquisition channel, other channels generate half of new accounts • Leveraging expertise across multiple channels focusing on activation and performance not just cost per account • Focus on continued growth in cost-effective acquisition of new accounts helps drive sales and receivables Note: (1) Excludes Student and Discover Business Card |
17 ©2007 Discover Financial Services Customer Satisfaction Rating 74% 71% 61% 58% 56% 52% Discover AMEX Citi JPM Chase BofA Cap One Notes: (1) 2006 Service Quality Measurement Group, Inc. (SQM) “World Class Customer Satisfaction” award (2) For the credit card industry by Keynote Systems, Inc. (2/06) Leader in Customer Service • Discover ranked #1 for both customer satisfaction (1) and online customer experience (2) • Industry leading customer service: – In-house/on-shore customer service – On-line services leadership • Leverage customer contacts to drive cross-sell revenue and customer retention Source: Phoenix Marketing AMS Card Reports Study, March 2006 – Total Affluent Market ($250K+ investable assets and/or $150K+ household income) |
18 ©2007 Discover Financial Services Notes: (1) Bear Stearns, Specialty Finance – Credit Card Rewards, January 2007 (2005 credit card spend) (2) Auriemma Consulting Group, Inc., April 2007 (3) 2006 TNS Consumer Card Strategies Research Program Rewards Preferences (2) Household Ownership of Cash Rewards Cards (3) Leader in Rewards • Rewards cards represent 77% of industry credit card spend (1) • Consumers overwhelmingly prefer cash rewards • Discover is the pioneer and leader in cash rewards with 50% market share – Customers earned over $750MM rewards in 2006 – 70+ merchant redemption partners • Rewards leadership position drives higher customer engagement, usage and loyalty 19% 15% 28% 53% 12% Cash Rebate Retailer Co-Brand Airline Mileage Gas Co-Brand Auto Rebate Discover JPM Chase AMEX Citi Cap One BofA 50% 15% 13% 12% 7% 3% |
19 ©2007 Discover Financial Services More • Up to 1% Cashback Bonus • 5% Get More program with 15+ rotating categories Extend Leadership in Rewards Motiva Open Road Miles Business • Up to 1% Cashback Bonus • Full month’s interest back for 6 consecutive timely payments, twice a year • Up to 1% Cashback Bonus • 5% rewards on gas and auto maintenance • Double Miles on travel and restaurant purchases • Unlimited miles that never expire (1) • Travel with no restrictions including airlines, hotels and cruises • Redemption starting at 1,000 miles • 5% Cashback Bonus on office supplies, 2% on gas • Also miles rewards program option • Fee-free Purchase Checks with rewards • Free employee cards with real-time customizable credit limits • Categorized online quarterly and annual statements •Redeem for up to double at 70+ merchant partners •Unlimited rewards that never expire (1) •5% - 20% cash rewards online with over 40 top retailers Note: (1) For active cardmembers |
20 ©2007 Discover Financial Services • Payment Protection • Identity Theft Protection • Wallet Protection • Gift/Prepaid Cards • CDs • Money Market • Personal Loans • Other Consumer Lending Expand Discover Branded Financial Products • Cross-sell to attractive, large credit card base • Meet the needs of new customer segments • Leverage brand, risk, marketing and operational expertise • Diversify asset and funding mix |
21 ©2007 Discover Financial Services Payments |
22 ©2007 Discover Financial Services Post-DOJ Progress Pre-DOJ Acceptance (Including Partners) Card Issuers Owned Networks Discover Payments U.S. Issuers U.S. Issuers China Japan Acquirers China Japan |
23 ©2007 Discover Financial Services 77% 95-96% 100% 97% 92% 70% Top 100 Retailers Visa/MC Accepting Merchants Acceptance at U.S. Merchants Sources: (1) Stores Magazine and internal research (2) “A National Retail Census of Product Distribution: Credit Cards” GfK NOP, Spring 2006; based on random sampling of approximately 1% of U.S. retail and service establishments Opportunity Visa/MasterCard Discover American Express (1) (2) Current Acceptance • Discover has unsurpassed acceptance with top 100 retailers, but has acceptance gap with smaller merchants • Objective is to significantly increase small merchant acceptance |
24 ©2007 Discover Financial Services Top Merchants 3rd Party Acquirers Direct 4MM+ Smaller Merchants 4MM+ Smaller Merchants Non-Accepting Merchants Acceptance Expansion Strategy • Close acceptance gap by outsourcing smaller merchant pricing, processing and servicing • Already 50%+ of volume share under acquirer agreements • Implementation of acquirer programs expected to be largely complete within two years • Improved acceptance expected to increase cardmember usage and balances |
25 ©2007 Discover Financial Services Network Transactions (Bn) 3.3 2.9 1.2 2004 2005 2006 DOJ Visa/MasterCard Ruling Discover Network PULSE Build Payments Volume • Acquisition of PULSE (1/05) positioned Discover to participate in fast-growing debit market • Third-party issuer volume leverages Discover Network’s largely fixed cost infrastructure • Third Party Payments profitable after just two years |
26 ©2007 Discover Financial Services International Card |
27 ©2007 Discover Financial Services $0.1 $0.8 $1.5 $2.1 $2.2 $2.6 $2.7 $4.6 $4.6 1999 2000 2001 2002 2003 2004 2005 2006 1Q07 Managed Credit Card Receivables ($Bn) Goldfish Acquisition U.K. Card History • Launched in 1999 – Cards issued on MasterCard network – Visa added in 2006 • Organic growth in receivables with added scale from Goldfish and Liverpool Victoria acquisitions (2006) • Primary brand shifting to Goldfish |
28 ©2007 Discover Financial Services (1%) 6% Other Expense (4%) Pretax Return on Managed Receivables +1% 3% Other Income (1%) 7% Provision for Loan Losses +1% 6% Net Interest Income Breakeven Requirement 1Q07 % of Managed Receivables U.K. Business Turnaround • The U.K. credit card market is currently under stress – High bankruptcies/delinquencies – Regulatory pressure on interchange and card fees – Yields lower than U.S. • Moving aggressively to eliminate loss – Optimize APRs – Improve credit and collections – Increase net revenues – Reduce expenses |
29 ©2007 Discover Financial Services Segment Results and Objectives • 9% Receivables Growth • $100MM Revenues (1) • ($41MM) PBT International Card • 15% Transaction Growth • $31MM Revenues (1) • $12MM PBT Third Party Payments • 6% Receivables Growth • $1.4Bn Revenues (1) • $401MM PBT U.S. Card 1Q07 Results Segment Objectives • Complete rollout of acceptance strategy • Grow Transactions 15%+ • Eliminate U.K. Loss Note: (1) Sum of Net Interest Income and Other Income • Grow Loans 4% – 8% • Maintain Credit Quality • 20%+ ROE |
30 ©2007 Discover Financial Services Financial Overview |
31 ©2007 Discover Financial Services Strong Financial Foundation for Growth • Long history of strong cash flow and ROE • Seasoned portfolio, stable underlying credit • Strong liquidity framework – Investment grade ratings – Adequate capacity to fund growth – Strong contingent liquidity sources • Established control systems in place |
32 ©2007 Discover Financial Services Strong Financial Performance 6.60% 6.00% 4.05% 5.23% 4.08% 2003 2004 2005 2006 1Q07 Managed Net Charge-off Rate $1,077 $234 $578 $776 $649 2003 2004 2005 2006 1Q07 ROE 14% 18% 13% 19% 15% Managed Receivables (Bn) $50.4 $50.8 $48.3 $48.4 $46.9 2003 2004 2005 2006 1Q07 3.18% 2.95% 5.39% 3.90% 5.04% 2003 2004 2005 2006 1Q07 Managed Cost of Funds (1) Net Income (MM) Notes: (1) Total credit card loans managed interest yield less managed interest spread |
33 ©2007 Discover Financial Services Managed Income Statement |
34 ©2007 Discover Financial Services Segment Results Note: (1) PULSE acquired in January 2005 |
35 ©2007 Discover Financial Services Note: (1) National Bankruptcy Research Center 2005–2007 Quarterly Analysis • 2007 quarterly comparisons (Y/Y) difficult due to bankruptcy legislation (10/05) • 4Q05 contained significant bankruptcy-related charges – I/O strip write down – Reserves added • 1Q06 received significant bankruptcy related benefits – I/O strip write up – Reserves released • Remainder of 2006 bankruptcy filings remained low • 4Q06 included benefit of tax settlements |
36 ©2007 Discover Financial Services Spin-off Related Impacts One–time 2Q07 – 3Q08 TBD Spin-off Related Costs Ongoing after transition 3Q08 and beyond $30-$40/Year Morgan Stanley Allocations Net Savings 4 years (Decreasing over time) 3Q07 – 3Q11 ($51)/Year Compensation Expense Ongoing 3Q07 and beyond ($65)/Year Stand-alone Funding/Liquidity Nature Timing Impact Fav/(Unfav) (MM) |
37 ©2007 Discover Financial Services 40% 52% 2% 6% Contingent Liquidity Sources at Spin (Pro Forma) Funding Note: (1) Pro Forma balance sheet with addition of asset-backed borrowings $5Bn+ Cash Liquidity Reserve $2.4Bn Unused ABCP Conduit Facilities $2.5Bn Multi-year Unsecured Committed Credit Facility Total Managed Funding at 2/28/07 (1) External Secured Borrowings ABS (Term and Private) Deposits Other Borrowings $53.1Bn |
38 ©2007 Discover Financial Services Notes: (1) Excludes goodwill and intangible assets (2) Net of allowance for loan losses Capitalization Key Capital Drivers • Underlying risk of business • Maintain well capitalized status at the bank • Rating agencies |
39 ©2007 Discover Financial Services Capital Generation Note: (1) Net Income divided by beginning stockholder’s equity 15% 20% 14% 23% 2003 2004 2005 2006 17-18% Average (4-8%) Target Growth in U.S. Card Receivables ~9-14% Available for Investment/ Dividends/Stock Repurchases Pro Forma Capital $5.4Bn Capital Generation (1) • It is management's intention to recommend to our board of directors that Discover pay a regular cash dividend |
40 ©2007 Discover Financial Services Key Assumptions for 2nd Half of 2007 • 2006 earnings were elevated by low bankruptcies and favorable tax settlements • Continued growth in U.S. Card sales and receivables • Loan losses expected to gradually increase as bankruptcies return to more normal levels • Spin-off related impacts |
41 ©2007 Discover Financial Services Investment Highlights • Unique franchise – a leading independent card issuer and payments network • U.S. card is a high margin, strong cash flow generator that is well positioned for growth • Expanding payments business • Opportunity to turnaround U.K. credit card business • Extending direct financial services that leverage brand, capabilities and large customer base • Well positioned to be stand alone company – Solid financial track record and capital position – Seasoned management team |