©2008 Discover Financial Services May 20, 2008 Lehman Brothers Financial Services Conference Exhibit 99.1 |
2 ©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 Form 10-Q for the quarter ended February 29, 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. |
3 ©2008 Discover Financial Services Business Overview U.S. Card Risk Management Payments Earnings, Capital and Funding Today’s Agenda Roy Guthrie Executive Vice President CHIEF FINANCIAL OFFICER |
4 ©2008 Discover Financial Services • PULSE and Discover Network third-party payments business – 4,500+ financial institutions – $96.8Bn network volume (2) • Diners Club International expected to be acquired • Discover cards issued on Discover Network – 6th largest issuer – $47.5Bn receivables (1) – $105.9Bn total volume (2) – 3rd largest U.S. merchant network Third-Party Payments U.S. Card Business Overview 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 • Maintain strong credit quality Objectives • Global acceptance • 18%+ third-party volume growth • Complete acquisition/integrate Diners Club International |
5 ©2008 Discover Financial Services Performance Against Objectives Objectives 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 • Close Diners Club acquisition 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 Closed On track |
6 ©2008 Discover Financial Services U.S. Card |
7 ©2008 Discover Financial Services U.S. Card Growth Foundation • Distinctive brand • Leading reward • Proprietary network • World-class customer experience |
8 ©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 |
9 ©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) |
10 ©2008 Discover Financial Services Leverage Network Merchant Relationships ShopDiscover Partners 100+ Cashback Bonus Partners |
11 ©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) 3rd party acquirer opportunity ~100% Note(s): (1) Acceptance estimate based upon Roper survey and data provided by third party acquirers |
12 ©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 |
13 ©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) |
14 ©2008 Discover Financial Services Risk Management |
15 ©2008 Discover Financial Services Risk Management Approach • Prudent risk management orientation • Strong analytic talent • State-of-the-art statistical tools and systems – Profit-based decisioning – Tradeline credit bureau data – Customer level line increase/decrease strategies – Internally developed models and strategies |
16 ©2008 Discover Financial Services 3.0% 3.5% 4.0% 4.5% 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 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 1Q08 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 |
17 ©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 as of 4Q07 |
18 ©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: 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 |
19 ©2008 Discover Financial Services Payments |
20 ©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 - Global payments network - POS and ATM acceptance across 185 countries $101Bn 20+ $91Bn 4,500+ $31Bn 40+ Overview Volume (1) Issuers (2) Note(s): (1) Discover Network and Pulse volumes for trailing four quarters ending 1Q08; Diners Club volume for calendar year 2007 (2) Diners Club issuers are licensees (3) Diners Club acquisition expected to close within 90 days of April 4, 2008, subject to regulatory approval and satisfaction of other closing conditions (3) |
21 ©2008 Discover Financial Services Acquisition of Diners Club International ©2008 Discover Financial Services Rationale • Unique opportunity to achieve global merchant acceptance • Accelerates Payments business volume/revenue • Enhances appeal to issuers, consumers, merchants and licensees Key Terms • Purchase price of $165MM, all cash • Closing anticipated within 90 days of April 4, 2008 • Near-term modest positive pretax profit contribution to Third-Party Payments of $10-$15MM |
22 ©2008 Discover Financial Services Diners Club International Structure Licensees Franchisor Merchants/ATMs • 8 million • 185 countries Cardholders $31Bn Volume • Owner and licensor of brand • Approves programs and annual business plan • Processes all cross- border transactions and provides currency conversion • Sets policies & procedures • 6 million cards issued • Exclusive license to issue cards and acquire merchants within geographic market • Pay royalty fees to franchisor • Responsible for local regulatory compliance • 40+ licensees |
23 ©2008 Discover Financial Services Earnings, Capital and Funding |
24 ©2008 Discover Financial Services 1Q 2008 Highlights EPS $0.50 Net Income $239MM Return on Average Equity 17% Continuing Operations |
25 ©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 generally 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) |
26 ©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 |
27 ©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% |
28 ©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 $34.8Bn versus $30.8Bn in 2007 YTD (1) • Depth of market participation has been reduced and sub bonds are being retained • Discover has been active with three recent public deals totaling $2.75Bn • 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 May 1st for 2007 and 2008 Issuance Maturities Discover Card Master Trust/ DCENT (Bn) |
29 ©2008 Discover Financial Services Credit Card Master Trust Excess Spreads 0% 2% 4% 6% 8% 10% 12% 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 Mar-08 Discover (I/C Subgroup) Average of JPM, BofA, Citi (CHAIT,BACCT,CCCIT) |
30 ©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) |
31 ©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 |
32 ©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 • Long-term ratings at Discover Bank • Fitch BBB+ • Moody’s Baa2 • S&P BBB Note(s): (1) Net managed receivables include receivables of Goldfish Bank for 3Q07 and 4Q07; were reclassified to discontinued operations in 1Q08 (1) (1) |
33 ©2008 Discover Financial Services 2008 Outlook ©2008 Discover Financial Services • Continued rise in delinquencies and charge-offs • Spreads should widen as cost of funds decreases • Funding environment choppy; ABS available, but remain at wider spreads Our Response: • Maintain lower balance transfer volumes/loan growth • Maintain prime underwriting focus • Remain conservative on liquidity and capital • Aggressive focus on payments opportunities |
34 ©2008 Discover Financial Services Q&A |