©2008 Discover Financial Services 1 Merrill Lynch Banking & Financial Services Conference November 11, 2008 Exhibit 99.1 |
©2008 Discover Financial Services 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 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 August 31, 2008, each of which is on file with the SEC and available on the Company’s website at www.discover.com. 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 Annual Report on Form 10-K for the year ended November 30, 2007, and “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Quarterly Reports on Form 10-Q for the quarters ended May 31, 2008 and August 31, 2008, which are on file with the SEC. Certain historical financial information about the Company that we have included in this 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. Notice |
©2008 Discover Financial Services 3 Positioned For Value Creation U.S. Card • Conservative growth strategy/prime customer focus • Superior relative credit risk performance • Leading rewards program/customer service • Tenured, loyal customer base Payments • Over 250% volume increase over past four years • Strong position in U.S. debit via PULSE • Dramatic increase in U.S. merchant acceptance • International acceptance and volume through Diners Club Liquidity & Funding • Multiple sources of financing and liquidity • Discover Bank is well-capitalized Visa/MasterCard Litigation Settlement • Positive earnings impact/strengthen capital base • Initiatives to build global business |
©2008 Discover Financial Services 4 What Has Changed Since November 2007 Economy • Negative GDP growth in 3Q08 • Unemployment/Underemployment • Bankruptcy filings • Consumer confidence • Consumer liquidity • Home price deflation Capital Markets • CDO/ABCP market disruptions • Financial services company issues – Bear Stearns – Fannie/Freddie – Lehman Brothers – AIG • Credit markets freeze • U.S. government intervention |
©2008 Discover Financial Services 5 Actions Discover Has Taken Card Issuing • Controlled growth & line management • Further tightened credit criteria & strengthened collections • Strengthened loss reserves – added $330MM YOY • Sold $4Bn UK issuing business Payments Businesses • Building-out U.S. acceptance – signed all major acquirers • Acquired Diners Club; platform for global acceptance • Expanding third-party issuing Capital and Funding • Capital level has grown – tangible equity ratio 11.2% • Increased liquidity pool to $9.6Bn • Expanded direct-to- consumer deposits to $5Bn • Settled V/MA litigation for $2.75Bn Note(s): Loss reserves, tangible equity ratio and liquidity pool figure as of August 31, 2008 |
©2008 Discover Financial Services 6 Unique Business Model • Discover is the only card issuer that operates global payment networks with both credit and debit capabilities • Discover Network supports the U.S. card & third-party issuing businesses • Strong position in U.S. debit via PULSE • International acceptance through Diners Club Card U.S. U.S. Issuing Credit Debit International American Express Visa MasterCard First Data/STAR Metavante/NYCE Citi Bank of America JPM Chase Capital One Networks |
©2008 Discover Financial Services 7 Distinctive Brand and Leader in Cash Rewards Unaided Issuer Brand Awareness Source: GfK Arbor, 3Q08 data Citi AMEX JPM Chase BofA Capital One Household Ownership of Cash Rewards Cards Source: 2007 TNS Consumer Card Strategies Research Program 45% 4% 13% 15% 15% 14% 17% 23% 26% 30% 60% 63% AMEX Capital One Chase Citi BofA |
©2008 Discover Financial Services 8 World Class Customer Service Customer Service Experience 68% 87% 66% 82% 95% 82% First Call Resolution (1) Calls Resolved Overall Customer Satisfaction Avg Call Center Measure •Call centers in-house; on-shore •46% of agents tenured over 3 years •More than 90% of agent handled calls answered within 60 seconds •280MM customer interactions per year through primary channels • #1 in Customer Loyalty – Brand Keys, 1998-2008 • World Class Customer Satisfaction Award – Service Quality Measurement Group, 2006-2008 • Top Tier Customer Service – J.D. Power and Associates, 2007 & 2008 • #1 Web Site in Overall Satisfaction – Keynote Systems – 2006 & 2007 Customer Service Awards Note(s): (1) 2007 Service Quality Benchmarking Report, Service Quality Measurement Group |
©2008 Discover Financial Services 9 -5% 0% 5% 10% 15% 20% 25% 2005 2006 2007 3Q08 Chase Capital One AMEX BofA Citi U.S. Receivables Growth Note(s): (1) U.S. Card (2) Card Services (3) U.S. Consumer Card (4) N.A. Cards Managed Receivables (YOY) Source: SEC Filings (3) (2) (4) (1) (1) (1) |
©2008 Discover Financial Services 10 58% 46% 58% 60% 73% 79% Citi BofA Chase AMEX Capital One Favorable Relative Portfolio Positioning Note(s): (1) Master Trust balances as of 9/16/08; based on receivables (2) Weighted average tenure of the receivables that are assets of the Chase Issuance Trust (3) Based on July 2008 calendar year YTD average (4) Excludes Discover Financial Services and American Express (5) Represented by Chase’s CHAIT Master Trust % of accounts outstanding (2) Distribution of Receivables (1) Portfolio Tenure (1) > 5 Years (two states with the highest mortgage foreclosure rates ) Cardmember Attrition (3) 4.1% 7.2% U.S. Industry Average (4) Source: Cardweb’s July 2008 Monthly Survey and Company data (5) 12% 13% 15% 14% 17% 6% 6% 7% 8% 9% 16% 18% 19% 22% 26% 10% 6% 22% Chase Capital One Citi BofA AMEX California Florida |
©2008 Discover Financial Services 11 Strong Relative Credit Performance Source: SEC Filings Managed 30+ Day Delinquency Rate (1) Note(s): (1) Discover fiscal year, all others calendar year (2) U.S. Card (3) Card Services (4) N.A. Cards Source: SEC Filings Managed Net Charge-Off Rate (1) (2) (3) (4) (2) (3) (4) Note(s): (1) Discover fiscal year, all others calendar year (2) U.S. Card (3) Card Services (4) U.S. & Intl. (2) (2) (2) (2) 2% 3% 4% 5% 6% 7% 2005 2006 2007 1Q08 2Q08 3Q08 Chase Capital One AMEX BofA Citi 2% 3% 4% 5% 6% 7% 2005 2006 2007 1Q08 2Q08 3Q08 Chase Capital One AMEX BofA (2) |
©2008 Discover Financial Services 12 • Unemployment levels • Housing prices • Energy costs • Consumer credit availability U.S. Credit Outlook Future loss rate factors: • 4Q08 managed net charge- off rate approaching 5.5% • 1Q09 managed net charge- off rate approaching 6% Future loss rate estimates: |
©2008 Discover Financial Services 13 • $5Bn volume in third quarter (2) – Platform for global acceptance – 185 countries/territories $60 $70 $86 $104 $79 $146 $163 $186 $212 $94 $96 $6 $5 $5 2004 2005 2006 2007 2008 (1) $ Volume On Our Networks V/MA Antitrust ruling (Bn) • $104Bn debit card volume – Over 4,500 issuers – 28% volume growth – 2.6Bn transactions • $6Bn third-party issuer volume – Over 30 issuers – 25% volume growth Notes: (1) Trailing four quarters ending 3Q08 (2) Acquisition completed June 30, 2008; volume for two months • $96Bn Discover Card proprietary volume – 4% volume growth |
©2008 Discover Financial Services 14 Achieving Broad U.S. Merchant Acceptance Sample Third-Party Acquirers Signed New acceptance model: • Maintain direct relationships with larger merchants • Leverage merchant acquirers to reach small to mid-size merchants Merchant acceptance progress: • Agreements in place with 88 acquirers; ~98% of U.S. volume (1) • 175,000 merchants signed per month (2) • New merchant boardings up 93% (fiscal YTD) Notes: (1) Bankcard volume (2) Monthly average in 3Q08 |
©2008 Discover Financial Services 15 Achieving International Acceptance & Volume Sample Diners Club Global Issuers Higher network volume, revenue and profits: • 44 global issuer licensees • Premium positioning, high average spending • Opportunity for new international partnerships Network interoperability targeted for 2010: • Diners Club doubles global merchant acceptance for Discover Network Cards • Inbound Diners Club volume on Discover Network |
©2008 Discover Financial Services 16 Notes: (1) Includes retained subordinate tranches Funding at August 31, 2008 • Deposits – Cost effective – Strong availability – Growing direct deposits business • Public ABS – Tight market – Higher spreads – $2.9Bn in 2009 maturities • Private ABS (bank conduits) – Six global top-tier banks – $1.5Bn open capacity Deposits ($27Bn, 47%) Term ABS (1) ($23Bn, 41%) Private ABS ($5Bn, 9%) Other ($2Bn, 3%) Funding Sources Funding Mix |
©2008 Discover Financial Services 17 Deposit Funding • Brokered deposits distributed through top tier U.S. wealth management firms • Direct-to-consumer deposit issuance continues to grow – Added $1Bn in 3Q08 • Extending CD maturities – Average maturity at 27 months vs. 22 months at prior quarter Deposit Growth At Spin (Bn) June 2007 Aug 2008 Change % Incr Brokered Deposits $16.1 $19.8 $3.7 23% Direct-to-Consumer 2.5 4.8 2.3 92% Sweeps/Other 1.7 2.2 0.5 30% Total Deposits $20.3 $26.8 $6.5 32% |
©2008 Discover Financial Services 18 9.4% 11.2% 6/30/2007 Spin-off 3Q08 Capital Management Tangible Equity/Net Managed Receivables Capital Management • Capital ratio has strengthened since spin-off – Solid earnings – Sale of U.K. business • Quarterly dividends of $0.06 per share since spin-off • Unchanged long-term ratings at Discover Bank – Fitch BBB – Moody’s Baa2 – S&P BBB • Tangible equity has grown from $4.8Bn at spin-off to $5.5Bn at August 31, 2008 |
©2008 Discover Financial Services 19 Visa/MasterCard Litigation Settlement $2.75 billion settlement agreement in antitrust dispute: • $862MM in 4Q08 • Expect $472MM per quarter in 2009 (1) Use of proceeds: • Positive earnings impact/strengthen capital base – Shift to on-balance sheet funding – Credit trends • Initiatives to build global business – Broadening acceptance – Expanding network volume – Enhancing brand recognition – Growing deposit franchise Notes: (1) Based upon achieving certain performance levels in network sales volumes |
©2008 Discover Financial Services 20 Positioned For Value Creation U.S. Card • Conservative growth strategy/prime customer focus • Superior relative credit risk performance • Leading rewards program/customer service • Tenured, loyal customer base Payments • Over 250% volume increase over past four years • Strong position in U.S. debit via PULSE • Dramatic increase in U.S. merchant acceptance • International acceptance and volume through Diners Club Liquidity & Funding • Multiple sources of financing and liquidity • Discover Bank is well-capitalized Visa/MasterCard Litigation Settlement • Positive earnings impact/strengthen capital base • Initiatives to build global business |
©2008 Discover Financial Services 21 Q&A |