©2008 Discover Financial Services March 20, 2008 Financial Community Briefing Exhibit 99.1 |
©2008 Discover Financial Services Craig Streem VP, Investor Relations Welcome |
3 ©2008 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. 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. The information provided herein may include certain non-GAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included in the Company’s Form 10-K for the year ended November 30, 2007 and the Company’s 1 st Quarter Earnings Release furnished on Form 8-K dated March 19, 2008, each of 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 the Company’s Form 10-K for the year ended November 30, 2007, which is on file with the SEC. The historical financial information prior to the Company’s spin-off from Morgan Stanley 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 such periods presented. |
©2008 Discover Financial Services David Nelms CEO Overview |
5 ©2008 Discover Financial Services • PULSE and Discover Network third-party payments business – 4,500+ financial institutions – $96.8Bn network volume (2) • Discover cards issued on Discover Network – 6 th largest issuer – $47.5Bn receivables (1) – $105.9Bn total volume (2) – 3 rd largest U.S. merchant network Third-Party Payments U.S. Card Business and Objectives Note(s): (1) Receivables reported on a managed basis as of February 29, 2008 (2) Volumes reported for the trailing four quarters ended 1Q08 ©2008 Discover Financial Services • 2.9% pretax ROMR • 4%-8% loan growth Objectives • Maintain strong credit quality • 18%+ third-party volume growth |
6 ©2008 Discover Financial Services U.S. Card • 2.9% pretax ROMR • Maintain credit quality • Grow loans 4 - 8% Third-Party Payments • Grow credit and debit volume 18%+ International • Close Goldfish sale in 2Q Performance Against Objectives Objectives 1Q Results (1) 24% volume growth 3.1% pretax ROMR 4.37% charge-off rate 3.93% 30+ day delinquency 2% growth (43% reduction in balance transfers, 5% growth in sales) Note(s): (1) Managed basis On track |
7 ©2008 Discover Financial Services Delinquency Trends (U.S. Card) ©2008 Discover Financial Services 0% 1% 2% 3% 4% 5% 6% 7% 8% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1Q08 Managed 30+ Day Delinquency Rate |
8 ©2008 Discover Financial Services $60 $70 $86 $94 $146 $79 $163 $5 2004 2005 2006 2007 Discover Card Discover Network Third Parties PULSE $186 Network Volume ©2008 Discover Financial Services DOJ (Bn) |
9 ©2008 Discover Financial Services U.S. Card Credit Payments Earnings, Capital and Funding Q&A Today’s Agenda Jim Panzarino CHIEF CREDIT RISK OFFICER Roger Hochschild PRESIDENT & CHIEF OPERATING OFFICER Roy Guthrie CHIEF FINANCIAL OFFICER Harit Talwar EXECUTIVE VICE PRESIDENT, DISCOVER NETWORK |
©2008 Discover Financial Services Roger Hochschild President & COO U.S. Card |
11 ©2008 Discover Financial Services Discover Vision & Mission To be the most rewarding relationship consumers and businesses have with a financial services company To help people spend smarter, manage debt better and save more so they achieve a brighter financial future Vision Mission |
12 ©2008 Discover Financial Services U.S. Card Growth Foundation • Distinctive brand • Leading rewards • Proprietary network • World-class customer experience • Strong risk management |
13 ©2008 Discover Financial Services 15% 23% 24% 28% 58% 60% AMEX Discover Capital One Chase Citi BofA Strong Brand Unaided Issuer Brand Awareness Source: GfK Arbor, 4Q07 data 2008 Brand Keys Award Winners |
14 ©2008 Discover Financial Services Citi AMEX JPM Chase Discover BofA Cap One Discover Continues to Lead Cash Rewards Household Ownership of Cash Rewards Cards (2) Source: 2007 TNS Consumer Card Strategies Research Program 45% 4% 13% 15% 15% 14% Note(s): (1) Comperemedia as of 1/9/08; per Discover fiscal quarters (2) Percentages add to >100% due to household use of multiple brands 15% 16% 22% 18% 16% 18% 18% 16% 15% 17% 20% 25% 27% 26% 24% 47% 41% 35% 41% 43% 4Q06 1Q07 2Q07 3Q07 4Q07 Discover Chase HSBC Other Cash Reward Mail Share (1) |
15 ©2008 Discover Financial Services More Key Features • 5% Cashback Bonus Program with 15+ rotating categories • Up to 1% unlimited Cashback Bonus New Products Expanding Cash Rewards Motiva Open Road Miles Business Key Features • Full month’s interest back for 6 consecutive timely payments, twice a year • Up to 1% unlimited Cashback Bonus Key Features • 5% Cashback Bonus on gas and auto maintenance • Up to 1% unlimited Cashback Bonus Key Features • Double Miles on travel and restaurant • 1 mile per dollar, unlimited • Travel with no restrictions Key Features • 5% Cashback Bonus on office supplies, 2% on gas • Up to 1% unlimited Cashback Bonus • Fee-free Purchase Checks with rewards Target • Confident credit users who maximize rewards Target • Credit users who feel traditional rewards programs don’t address their needs Target • Value-conscious consumers open to credit as a means of savings Target • Credit users frustrated with restrictive and complex travel rewards programs Target • Small businesses needing cash flow flexibility and superior service • Rated best in category “cash-back” card 6/07 • “A credit card it pays to pay” 5/07 • Rated one of the “top gasoline cards” 7/07 • “Versatile travelers: If you’re frequently traveling by plane, train and automobile, rejoice” 5/07 |
16 ©2008 Discover Financial Services Leverage Network Merchant Relationships ShopDiscover Partners 100+ Cashback Bonus Partners |
17 ©2008 Discover Financial Services Leverage Merchant Relationships Discover Extras Mall Programs |
18 ©2008 Discover Financial Services Large Merchants Small Merchants Impact of Increased Acceptance Acceptance Benefit • Increase share of wallet • Higher cardmember usage and balance • Improve new account response rates • Appeal to new customer segments Merchant Acceptance % of Visa/MasterCard Merchants ~85% (1) 3 rd party acquirer opportunity ~100% Note(s): (1) Acceptance estimate based upon Roper survey and data provided by third party acquirers |
19 ©2008 Discover Financial Services KNOWLEDGEXPO 2008 Over 120 Million Branded Phone Conversations • Outstanding service is rooted in our people and culture • “Discover” service delivery is enabled by: – Integrated communications – Targeted training and coaching – Effective performance metrics – Flexible infrastructure and online guidance |
20 ©2008 Discover Financial Services World-Class Customer Service Customer Service Agent Tenure • 46% of agents are tenured at 3 yrs • 11% of agents are tenured 10 yrs 42% 56% World Class Calls (2) 66% 82% Overall Customer Satisfaction 68% 87% 82% 95% First Call Resolution Calls Resolved Avg Call Center Discover Measure First Call Resolution (1) Source: (1) 2007 Service Quality Benchmarking Report, Service Quality Measurement Group Note(s): (2) World Class Calls: % of customers who are overall very satisfied (top box response) with their call center experience, are very satisfied with the top five service quality metrics (caring, helping, knowledge, decision and resolution) and their call was resolved 0-6 months 18% 1-3 years 22% 3-5 years 10% 5-10 years 25% 10+ years 11% 7-12 months 14% |
21 ©2008 Discover Financial Services Over 400 Million Internet Interactions |
22 ©2008 Discover Financial Services Protection Products |
23 ©2008 Discover Financial Services 2007 J.D. Power Card Satisfaction Index Recognized Leader in Customer Experience 571 607 617 636 638 646 651 652 728 735 AMEX DFS Citi Chase U.S. Bank WaMu Wells Fargo Cap One BofA HSBC #1 Rewards Discover Ranking Satisfaction Categories #2 Problem Resolution #2 Fees/Rates #1 Billing/Pmt Proc #2 Benefits/Features Source: 2007 Credit Card Satisfaction Study-J.D. Power |
24 ©2008 Discover Financial Services 44% 44% 58% 67% 72% 77% Discover Citi AMEX BofA Capital One Chase Customer Experience Drives Cardmember Loyalty Note(s): (1) Excluding Discover Financial Services and American Express (2) Latest Master Trust balances as of 3/18/08; based on receivables (3) Weighted average tenure of the receivables that are assets of the Chase Issuance Trust > 5 Years Cardmember Attrition Portfolio Tenure (2) (3) 4.5% 9.1% Discover U.S. Industry Average Source: Cardweb’s January 2007 Monthly Survey (1) |
©2008 Discover Financial Services Jim Panzarino SVP, Chief Credit Risk Officer Credit |
26 ©2008 Discover Financial Services Risk Organization Capabilities • Prudent risk management orientation • Strong analytic talent • State-of-the-art statistical tools and systems |
27 ©2008 Discover Financial Services Acquisition Process • Systemic decisions supplemented by manual underwriting • Apply credit criteria including assessment of stability, ability and willingness to pay • Use internally derived credit models incorporating application and bureau data • Assign credit line using macroeconomic information • Fully integrated acquisition decision making and controls New Credit Card Account Average FICO Score at Booking 734 737 738 734 2004 2005 2006 2007 |
28 ©2008 Discover Financial Services Portfolio Management • Profit-based decisioning • Tradeline credit bureau data • Customer level line increase/decrease strategies • Internally developed models and strategies |
29 ©2008 Discover Financial Services Portfolio Positioning in Current Environment DFS Homeownership Distribution (2) DFS Mortgage Distribution (2) Demographic Profile (1) 73% 48% 42% 65% 36% 30% Married College Graduate Income > $75K Discover Other Issuers Mortgages 54% Own Outright 21% Rent, Other 25% Fixed Prime 73% Fixed Non- Prime 9% ARM Non- Prime 3% ARM Prime 15% Source: (1) TNS Financial Services’ 2007 Consumer Card Study (2) Based on Credit Bureau and internal data |
30 ©2008 Discover Financial Services Effective Collections/Recovery Organization Proactively work with customers • Focusing on early identification, support and rehabilitation • Using risk profiles and analytics to segment our customer population and offer targeted repayment programs • Utilizing our own 2,000+ U.S. based employees • Not selling distressed assets |
31 ©2008 Discover Financial Services Proactive Portfolio Management Prior to the subprime difficulties • Identified areas of concern in our portfolio using tradeline data • Refined geographic risk rules for marketing activities and credit line actions • Tightened underwriting criteria to applicants with overextended mortgages Once problems appeared • Identified and reduced marketing into rising risk areas • Suppressed automated line increases in riskier states • Closed potentially high-risk inactive accounts |
32 ©2008 Discover Financial Services 44% 44% 58% 67% 72% 77% Discover Citi AMEX BofA Capital One Chase 10% 12% 12% 15% 14% 17% 6% 6% 7% 8% 9% 16% 18% 18% 22% 25% 6% 21% Discover Chase Capital One Citibank BofA AMEX California Florida Portfolio Positioning Versus Peers Source: Latest Master Trust balances as of 3/18/08; based on receivables Note(s): (1) Weighted average tenure of the receivables that are assets of the Chase Issuance Trust (2) As represented by Chase’s CHAIT Master Trust (1) (2) Distribution of Receivables Portfolio Tenure > 5 Years |
33 ©2008 Discover Financial Services 3.0% 3.5% 4.0% 4.5% 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Jan-08 Discover Industry Master Trust 30+ Day Dollar Delinquency Rate (1) -60% -40% -20% 0% 20% 40% 60% 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 Jan-08 Discover Industry Master Trust YOY Variance in Net Loss Rate (1) Source: (1) Industry includes Bank of America, Capital One, Chase and Citigroup Credit Trends Versus Peers |
©2008 Discover Financial Services Harit Talwar EVP, Discover Network Payments |
35 ©2008 Discover Financial Services Discover Network - Branded, scaleable, signature network - Broad product range with unique functionality - ‘Closed loop’ network benefits - Reciprocal agreements with ChinaUnion Pay and JCB - 3 rd largest PIN / POS network $101Bn 20+ $91Bn 4,500+ Overview Volume (1) Issuers Note(s): (1) Trailing four quarters ending 1Q08 |
36 ©2008 Discover Financial Services Issue PULSE Issue Discover Network Acquire Merchants Bank of America JPMorgan Chase Citi Capital One HSBC N/A Washington Mutual N/A Wells Fargo USAA Savings N/A US Bank GE Money Relationships with Top 10 Banks Note(s): (1) In partnership with First Data (1) (1) (1) • 8 of 10 issue or acquire • 5 of 10 issue debit or credit |
37 ©2008 Discover Financial Services PULSE Strategy • Continue to grow customer base and market share – Competitive pricing – Exclusive relationships • Drive revenue and earnings by leveraging highly scalable infrastructure and controlling expenses • Build on success of Discover Network acceptance initiative to support marketing of Discover Debit • Technology and product enhancements – Debit Protect – Reporting Analytics |
38 ©2008 Discover Financial Services PULSE 2007 Highlights 2007 Market Share Transaction Volume Growth 16% 24% 2006 2007 Accel / Exchange 4% Other 4% PULSE/ Discover 12% Interlink / Visa 41% Star / FDC 29% NYCE / Metavante 10% Source: ATM & Debit News, EFT Data Book (2008) |
39 ©2008 Discover Financial Services Acceptance Model Timeline 2005 2009 Internal Systems/Operations Sign 3rd Party Acquirers 2006 2007 2008 Implementation • Implementation on track; 2008 new merchant boardings expected to exceed targets • Acceptance parity tracking to internal milestones • Signed 55 acquirers who service approximately 6 million merchant relationships • Program and learnings have validated model and enhanced multiple processes • • Support • Pre-DOJ Small Merchants Sales Boarding Large Merchants Acquirer New Program Acquirer Acquirer |
40 ©2008 Discover Financial Services Acceptance – Execution Progress 1Q07 1Q08 Early results encouraging: • 100% inclusion in fully integrated solution • We estimate 34% of existing bank card accepting merchants who did not accept Discover Network have been boarded New Outlets Progress by Partner 132% increase Status - Implementation underway Interim Program Live Integrated Front end Activating Discover for Bank Card Portfolio Chase Paymentech Bank of America First Data NOVA Information Systems Fifth Third Wells Fargo Global Payments Heartland First National Merchant Solutions RBS Lynk |
41 ©2008 Discover Financial Services • Multi-audience • Merchants • ISOs • Consumers • Multi-Channel • Direct mail, telemarketing, inserts • Merchant and ISO visits and forum • Sweepstakes • Advertising • Consumer communication message development underway Integrated Marketplace Communication |
42 ©2008 Discover Financial Services Third-Party Issuing • Strong brand choice • Competitive interchange and assessments • Robust product suite and acceptance • Flexibility and ease of implementation • Customized usage programs leveraging merchant relationships Leveraging Discover Network Relationships Value Proposition Programs and Sample Issuers • Consumer Credit • Business Credit • Payroll • Private label • Prepaid / Gift Third-Party Volume (Bn) $5.5 2005 2006 2007 |
43 ©2008 Discover Financial Services Third-Party Payments Economics (MM) 2005 2006 2007 YOY % Volume (Bn) $61.2 $73.2 $91.7 25% Revenue 93 112 121 8% Expenses (93) (84) (84) 1% Pretax Income $0 $29 $37 28% Profit Margin 0% 26% 31% |
©2008 Discover Financial Services Roy Guthrie EVP, Chief Financial Officer Earnings, Capital and Funding |
45 ©2008 Discover Financial Services 1Q Highlights EPS $0.50 Net Income $239MM Return on Average Equity 17% Continuing Operations |
46 ©2008 Discover Financial Services 0 1 2 3 4 5 6 7 8 9 10 1M LIBOR Charge-Off Rate Margin Offsets to Rising Credit Losses • Market funding costs decline when losses rise • Fixed rate APR accounts maintain pricing • Higher delinquency rates trigger higher finance charges and late fees • Potential reduction in promo BTs supports higher yield • Higher loan loss reserves when delinquencies rise • I/O asset revalues with changes in charge-offs and funding costs Margin Response to Rising Credit Losses Industry Credit Card Losses Generally Move Opposite to Market Interest Rates Source: Federal Reserve and Economy.com Note(s): (1) 1Q08 data is quarter to date through 3/11/08 (2) Represents credit card consumer loan charge-offs for top 100 commercial banks (%) (2) |
47 ©2008 Discover Financial Services 1Q Results – U.S. Card (Managed Basis) Note(s): (1) Managed receivables $MM % MR (1) $MM % MR (1) YOY % Interest Margin $888 7.7% $983 8.1% 11% Other Revenue 490 4.2% 602 5.0% 23% Total Revenue $1,378 11.9% $1,585 13.1% 15% Charge-Offs 447 3.9% 527 4.3% 18% Reserve Build (41) -0.4% 100 0.8% N/M Total Provision $406 3.5% $627 5.2% 54% Expense 572 4.9% 583 4.8% 2% Pretax Income $400 3.5% $375 3.1% (6%) Average Receivables (Bn) $47.0 $48.9 4% Sales (Bn) $22.0 $23.2 5% 1Q07 1Q08 |
48 ©2008 Discover Financial Services Margin Offsets to Rising Credit Losses U.S. Card (Managed Basis) (% of Managed Receivables) 1Q07 1Q08 Interest Yield (1) 12.5% 12.7% Net Interest Expense (2) (4.8%) (4.6%) Interest Margin (3) 7.7% 8.1% Charge-Offs (3.9%) (4.3%) 3.8% 3.8% (MM) Net Revaluation of Retained Interests $75 Change in Loan Loss Reserve (100) Net Impact ($25) Note(s): (1) Managed interest yield on credit card loans (2) Interest yield less interest margin (3) Net yield on managed loan receivables |
49 ©2008 Discover Financial Services 1 st Quarter Results – Third-Party Payments (MM) 1Q07 1Q08 YOY % Total Revenue $31 $35 12% Total Expense 19 19 0% Pretax Income $12 $16 30% Operating Profit Margin 38% 44% Volumes (Bn) PULSE $20.0 $24.8 24% Third-Party Issuers $1.2 $1.5 27% |
50 ©2008 Discover Financial Services Managed Balance Sheet Note(s): (1) Includes discontinued operations Consolidated (Bn) 11/30/07 2/29/08 Assets Cash and Cash Equivalents $8.1 $8.3 Managed Receivables 47.4 46.6 Other Assets (1) 10.3 11.3 Total Assets $65.8 $66.2 Liabilities and Equity Asset-Backed Securitization $27.0 $27.7 Brokered CD and Other Bank Sources 27.2 27.1 Other Liabilities (1) 6.0 5.7 Total Liabilities $60.2 $60.5 Total Equity 5.6 5.7 Total Liabilities and Equity $65.8 $66.2 |
51 ©2008 Discover Financial Services Asset-Backed Securitization ABS Market Update • ABS market continues to be challenging but open for AAA issuance – Total 2008 YTD issuance of $21.6Bn versus $18.6Bn in 2007 YTD (1) • Depth of market participation has been reduced and sub bonds are being retained • Discover has been active with two recent public deals totaling $1.9Bn • New issuances at wider spreads and typically shorter durations $1.6 $1.1 $2.6 $1.6 $3.7 $1.2 $2.3 $2.9 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 Total ABS Issuance ABS Maturities Source: (1) Bank of America; ABS issuance through March 10th for 2007 and 2008 Issuance Maturities Discover Card Master Trust/ DCENT (Bn) |
52 ©2008 Discover Financial Services Credit Card Master Trust Excess Spreads 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% Feb-07 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Discover (I/C Subgroup) Average of JPM, BofA, Citi (CHAIT,BACCT,CCCIT) |
53 ©2008 Discover Financial Services $3.5 $18.5 $3.0 Brokered Direct to Consumer and Others Sweeps Bank Deposit Funding • CDs are issued through top tier U.S. wealth management firms • Discover continues to focus on extending maturity profile by issuing deposits in longer tenures • Direct-to-consumer deposit issuance continues to grow Bank Deposits – 1Q08 (Bn) |
54 ©2008 Discover Financial Services Contingent Funding Sources At Spin (Bn) June 2007 November 2007 February 2008 Cash $5.1 $8.3 $8.3 AAA ABS Capacity 2.4 4.7 6.0 Bank Revolver 2.5 2.5 2.5 Total Contingent Funding $10.0 $15.5 $16.9 (1) (1) Note(s): (1) Includes Goldfish liquidity |
55 ©2008 Discover Financial Services 10.5% 10.2% 11.5% 3Q07 4Q07 1Q08 Capital Management Tangible Equity/Net Managed Receivables Capital Management • Capital has strengthened since spin-off – Solid earnings – Sale of U.K. business • Quarterly dividends of $0.06 per share since spin-off • Authorized up to $1 billion of share repurchases over the next 3 years • Stable long-term ratings at Discover Bank • Fitch BBB+ • Moody’s Baa2 • S&P BBB Note(s): (1) Net managed receivables include Goldfish receivables for 3Q07 and 4Q07; have been reclassified to discontinued operations in 1Q08 (1) (1) |
56 ©2008 Discover Financial Services 2008 Outlook ©2008 Discover Financial Services • Continued rise in delinquencies and charge-offs (4.75%-5.00% full year) • Spreads should widen as cost of funds decreases • Funding environment choppy; ABS available, but remain at wider spreads • Maintain lower balance transfer volumes/loan growth • Maintain prime underwriting focus • Remain conservative on liquidity and capital • Aggressive focus on payments opportunities |
©2008 Discover Financial Services David Nelms CEO Q&A |