2011 Financial Community Briefing March 23, 2011 Exhibit 99.1 |
2 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 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 Annual Report on Form 10-K for the year ended November 30, 2010 and the Company’s Current Report on Form 8-K dated March 22, 2011, each of which are on file with the SEC and available on the Company’s website at www.discoverfinancial.com. Certain reconciliations are also included at the end of this presentation. 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 – Supervision and Regulation" 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, 2010, which is 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. We own or have rights to use the trademarks, trade names and service marks that we use in conjunction with the operation of our business, including, but not limited to: Discover ® , PULSE ® , Cashback Bonus ® , Discover ® Network and Diners Club International ® . All other trademarks, trade names and service marks included in this presentation are the property of their respective owners. |
3 Roger Hochschild PRESIDENT & CHIEF OPERATING OFFICER Carlos Minetti PRESIDENT CONSUMER BANKING & OPERATIONS Harit Talwar PRESIDENT U.S. CARDS Diane Offereins PRESIDENT PAYMENT SERVICES Exploiting the payments opportunity Diversifying into higher growth asset classes Driving profitable card growth 2010 Accomplishments & 2011 Priorities Delivering shareholder value through strong financial performance Roy Guthrie CHIEF FINANCIAL OFFICER Q&A Agenda David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER Using our Direct Banking & Payments assets to deliver profitable growth |
2011 Financial Community Briefing David Nelms Chairman & Chief Executive Officer Using our Direct Banking and Payments assets to deliver profitable growth CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
5 Strong results in Direct Banking and Payments • Card business generating strong profitability – Credit trends provide flexibility to invest for growth – Expect modest Card receivable growth in 2H 2011 • Have continued to diversify our portfolio with the acquisition of The Student Loan Corporation – Other consumer lending receivables are now ~15% of total receivables – Leveraging unsecured lending and marketing capabilities to drive more rapid asset growth at attractive returns • Focused on increasing acceptance globally and exploiting opportunities in debit and mobile – Targeting Payment Services long-term profit growth of 15-20% with 10%+ volume CAGR • We continue to generate excess capital and are one of the first financial services companies to restore the dividend – Fully restored quarterly dividend to $0.06 |
6 Preferred Banking Channel (%) Source American Bankers Association Survey 2010 95% 82% 76% 76% 59% 99% Citi BofA Amex JPMorgan CapOne DFS 2 Yr Avg. Risk Adjusted Efficiency Ratio (1) (%) Source SNL, Regulatory Reports FY2010 & FY2009 Note(s) 1. Non-interest expense divided by net revenue less provisions 2. Excludes one-time special items per Bank of America presentation dated 3/9/11 Direct banking is efficient & aligns with consumer preference (2) Direct Channels Internet 36% Mail 8% Branch 25% ATM 15% NA 7% Phone / Mobile 9% |
7 • Discover Network – Growth in merchant acceptance and partnerships – Mobile and alternative payment opportunities provide longer-term potential • PULSE – Continue rapid volume and profit growth – Regulatory changes may create opportunity for share gain • Diners Club – Improve competitive position in key markets – Drive growth from network deals with JCB, BC Card, etc. Unique payments assets are growing rapidly $29 $141 2006 2010 Payment Services Pre-Tax Profits (MM) 2006 – 2010 CAGR: 48% |
8 Profitable long-term growth model Asset Growth EPS Growth / Contribution Card 2 - 4% 3 - 4% Other Consumer Lending 20 - 25% 3 - 4% Payments NA 2%+/- Organic Growth 5 - 6% 8 - 10% Capital Management / Acquisitions 0 - 4% 2 - 5% Total Growth 5 - 10% 10 - 15% Targets: TCE / TA (1) ~8% ROE 15% + Note(s) 1. Defined as tangible common equity to tangible assets |
2010 Accomplishments & 2011 Priorities Roger Hochschild President & Chief Operating Officer CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
10 • Record year for Discover card sales volume – $92.5 billion with growth of 6% YOY • Announced acquisition of The Student Loan Corporation – ~$4 billion in private student loans (1) • Continued success in direct-to-consumer (DTC) deposit funding – 64% increase in DTC deposits to $20Bn+ • Increased merchant acceptance – 8% increase in net active merchant outlets • Improved credit performance – 185bps decrease in net charge-offs from 4Q09 to 4Q10 • Strong year of profits – $765 million net income with ROE 15%+ for 2Q10 to 4Q10 • Focused on capital / liquidity / funding – 10% tangible common equity / tangible assets (2) 2010 – another year of significant accomplishments Note(s) 1. $3.1 billion after purchase accounting on 12/31/10 2. See appendix for reconciliation |
11 Superior risk management drives credit outperformance Note(s) 1. Discover data based on calendar year; adjusted for FAS 166/167 for periods prior to 1Q10 2. Includes JPM Chase (Card Services), Citi (Branded Card NA), American Express (U.S. Card), Capital One (U.S. Card) and Bank of America (U.S. Card) Credit Card Net Charge-Off Rate (%) 4% 5% 6% 7% 8% 9% 10% 11% 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 Discover Peer Avg (1) 4Q10 • Disciplined approach – Continuous investment in analytics / data sources – Strong credit performance and well positioned portfolio • Using card capabilities to drive growth – Viable cross-sell opportunities to existing card customers – Judgmental underwriting with analysis of cash flows (2) |
12 2011 Performance Priorities Card • Return to growth by gaining wallet share and increasing new accounts • Expand merchant acceptance and marketing partnerships to drive sales Payments • Capture opportunities from changing debit market • Leverage strategic partnerships to build global network Student & Personal Loans • Integrate SLC & build upon profitable position in private student lending • Continue to generate strong returns in personal loans and expand into new categories Savings • Leverage retail deposit channel to provide liquidity and optimize funding cost • Expand affinity business and suite of banking products |
Harit Talwar President, U.S. Cards Driving profitable card growth CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
14 Well positioned for profitable growth • Our business is positioned to generate a pre-tax ROA of 2.5%+ and an ROE of 15%+ on a sustainable basis • Increasing usage and wallet share with existing customers, leveraging: – Brand leadership in Rewards, Service and Value – Unique partnerships with leading merchants – New programs and acceptance expansion – Increased brand presence • Strong growth in new accounts • Outperforming the industry over the last two years: Discover (1) Peer Avg (2) Sales 2% (11%) Receivables (9%) (23%) • Continued momentum – 1Q11: Sales 7% and receivables (3%) Note(s) 1. Calendar year; data prior to 2010 adjusted for FAS 166/167 2. Includes AXP, BAC, C, COF, and JPM Source Internal data, public company filings and The Nilson Report (Nilson) |
15 Delivering robust revenue margin through the cycle Restrictions on re-pricing / fees Interest charge-offs Pricing actions Lower promotional receivables – – + + Restrictions on re-pricing / fees Higher promotional receivables Spend margin Interest charge-offs – – + + Post CARD Act / Economic Cycle CARD Act / Economic Cycle Impact |
16 Note(s) 1. Discover fiscal 2008 52% 66% 75% 27% 22% 10% 21% 12% 15% Pre-CARD Act 1Q 11 Normalized Promotional Standard Default / Cash Modified the business model to reduce reliance on promotional balances (1) |
17 Attractive opportunity for growth with existing customers Discover Discover Off-Us Off-Us On-Us On-Us Sales Loans Note(s) Loans / Sales – Credit bureau data and internal modeling On-Us represents activity with Discover Card; Off-Us represents activity by Discover Cardmembers with other competitors |
18 79% 79% 72% 72% 72% 71% DFS AXP JPM C BAC COF Source 4Q 2010 Brand Tracker study, Millward Brown Brand resonating strongly with customers Recommend to a Friend (1) 1. % of survey participants who strongly / somewhat agree with the statement “I would recommend to a friend”; among cardholders who say they use that brand’s card most often to make purchases Note(s) |
19 Sustained rewards leadership 67% 42% 33% 29% 23% 18% DFS JPM AXP C COF BAC Best Cash Rewards (1) Source 4Q 2010 Brand Tracker study, Millward Brown Note(s) 1. % of unaided cardmembers who identify the brand with the statement “best cash rewards”; among cardholders who say they use that brand’s card most often to make purchases |
20 Rewards programs driving record levels of customer engagement 14 18 23 2008 2009 2010 Enrollments (MM) |
21 Merchant programs delivering value to customers Note(s) Internal data; Value to Customers reflects the extra rewards/discounts received by customers from merchants on Discover offers 13% Value to Customers Merchant Partners $ 100MM 300+ 24% YOY |
22 Acceptance and marketing programs driving usage and sales Note(s) 1. Estimation based upon previously non-accepting and accelerated sign-up of new merchants Sales Impact ($Bn) (1) $3.4 $2.4 $1.4 2008 2009 2010 |
23 280MM+ opportunities to deliver great customer experience J.D. Power Customer Satisfaction Score 769 757 711 699 699 692 AXP DFS JPM BAC COF C Source J.D. Power and Associates, 2010 Credit Card Satisfaction Study 33MM Conversations 250MM Interactions Note(s) Overall score is a composite of six weighted factors including interaction, billing and payment process, credit card terms, rewards, benefits and services, and problem resolution. Total possible score = 1000 |
24 Strong analytics and risk management identifying growth opportunities Integrated account lifecycle management Investment in judgmental underwriting Customer insight driving offers Enhanced balance transfer functionality Control Test Control Test 45% 30% Customer Response Rate Balance Transfer Volume Case Study: Balance Transfer Functionality Note(s) Control population mailed standard offer. Test population mailed alternative offer. Test conducted in 3Q10. |
25 Increasing wallet share 2008 2010 2008 2010 Wallet Share of Loans Wallet Share of Sales 16% 27% Sources Internal calendar year data and public company data Note(s) Wallet Share is the amount of customer loans / sales with Discover vs. other cards in the wallet Share based upon credit bureau data and internal modeling |
Strong new account growth 24% Spend per Account Average FICO New Accounts 25% 728 1Q11 YOY Note(s) 1. Based on the 2010 Brand Keys Customer Loyalty Engagement Index Report (1) 26 |
27 Note(s) 1. Among general population; % of cardmembers who strongly / somewhat agree with the statement “provides excellent overall value” Source 4Q 2010 Brand Tracker study, Millward Brown 35% 34% 33% 30% 26% 25% DFS JPM AXP COF BAC C Establishing value leadership Provides Excellent Overall Value (1) |
28 Significantly increasing brand presence Share of Media Spend (1) Share of Voice (2) Note(s) 1. Share of Spend = Discover media spend vs. AXP, BAC, C, COF, JPM, V, MA 2. Share of Voice = Total Discover media impressions vs. AXP, BAC, C, COF, JPM, V, MA 3. Average of 2005-2009 6% 11% Historical 2010 7% 20% Historical 2010 (3) (3) Source Nielsen |
31 Well positioned for profitable growth • Our business is positioned to generate a pre-tax ROA of 2.5%+ and an ROE of 15%+ on a sustainable basis • Increasing usage and wallet share with existing customers • Strong growth in new accounts • Outperforming the industry in sales and receivables over the last two years |
Carlos Minetti President, Consumer Banking & Operations Diversifying into higher growth asset classes CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
33 Achieved significant milestones in direct banking expansion • Delivered a differentiated value proposition and extended reach of Discover brand to become top 5 in: – Direct deposits – Personal loans – Student loans • Achieved scale and earned customer loyalty in deposits • Attained growth and profitability targets in personal loans • Acquired The Student Loan Corporation and became a leader in student loans |
34 Discover Direct Deposits |
35 Discover has grown to become a leader in direct deposits Direct Deposits (Bn) Direct Deposit Competitors (Bn) (1) $20.6 $12.6 $6.1 $3.4 2007 2008 2009 2010 4Q10 Market Share % ING Bank, FSB $77.7 29% Charles Schwab Bank $50.6 19% USAA Federal Savings Bank $35.6 13% Ally Bank $24.7 9% Discover Bank $20.6 8% E*TRADE Bank $15.6 6% American Express Bank, FSB $8.9 3% Other $35.1 13% Total $268.8 100% Note(s) 1. Includes non-brokered, direct banks with fewer than 10 branches 2007 – 2010 CAGR: 82% Source Informa Research Services, SNL, internal data |
36 Note(s) 1. Balance percentages as of FYE2010 2. Transaction expected to close mid-year, subject to regulatory approval We have developed strong customer and affinity relationships • Surpassed $2Bn in deposits in 2010 • Launched in May 2010 • Announced in February 2011 • Acquiring ~ $1Bn in deposits (2) • Signed in March 2011 Depth of Relationships (1) Affinity Relationships Single Deposit Account Multiple Deposit Accounts Deposit + Card Account Deposit + Affinity Account 43% 12% 20% 25% |
37 Our success comes from a focus on service and value |
38 Our value proposition resonates with consumers $37K $50K $36K CD Retention Rate Money Market Balance Build 79% 77% 77% 77% 77% 4Q09 1Q10 2Q10 3Q10 4Q10 30% Note(s) 1. Discover 2010 annual data 2. Representative of industry over-the-cycle experience, 2006 – 2010 -28% Initial Balance After 1 Yr Initial Balance After 1 Yr Discover (1) Industry (2) $48K Source First Manhattan Consulting Group |
39 Direct deposits has become a large and attractive funding source Relative Funding Costs March 2011 Funding Sources November 2010 Direct-to- Consumer (1) Brokered CDs (2) ABS Other Internal Benchmark (1) Direct-to-Consumer 30% 26% 40% 4% Total: $52Bn On-line Savings 24-month CD 5-year CD 0% 1% 2% 3% Note(s) 1. Obtained from consumers directly or through affinity relationships 2. Obtained through third-party securities brokerage firms who offer our deposits to their customers Note(s) 1. Internal analysis of Discover funding sources |
40 Direct deposits is positioned to support firm-wide growth • Targeting deposit growth of 20-25% in 2011 – Product expansion – Additional affinity relationships • Continue investment in infrastructure • Economics further improve in rising rate environment |
41 Discover Personal Loans |
42 Personal Loans poised for sustained growth Personal Loans Receivables Growth ($Bn) $0.2 $1.0 $1.4 $1.9 2007 2008 2009 2010 2008 – 2010 CAGR: 37% |
43 We have achieved leadership in the prime credit segment 2010 Industry Originations ($Bn) Market Position (Prime Only) $12 $5 $4 Prime Near Prime Sub Prime 16% 8% 76% Discover 5 Peers (1) Others Note(s) 1. Includes: Citibank, Chase, Wells Fargo, Bank of America and Capital One Total: $21Bn Total: $12Bn Source Credit bureau data, Discover analysis Source Credit bureau data, Discover analysis |
44 Consumer acceptance is driven by a compelling value proposition • Competitive rates relative to substitutes – 300bps – 400bps lower than existing debt (1) • Financial control – Fixed single monthly payment – Paydown within set time frame • Customer experience – Consultative underwriting – Quick decision and funds disbursement Note(s) 1. Discover internal analysis |
45 Disciplined underwriting is a key contributor to profitability • Custom credit and paydown models – 40% lift compared to generic models • Judgmental underwriting with analysis of cash flows • Verification of income or employment • Direct payment to creditors for debt consolidation Origination by Credit Score Industry Discover 0% 10% 20% 30% 40% 50% 501- 600 601- 700 701- 800 801- 900 901- 990 Source Credit bureau data, Discover analysis of 2010 originations |
46 Our business model generates competitive credit performance Vintage Charge-Off Curves 60+ Past Due Rates (%) Industry Discover 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 2 4 6 8 10 12 14 16 Months on Book Prime Peers Discover 0.73% 1.37% 0.98% 3.45% 3.31% 3.54% Q4-08 Q4-09 Q4-10 Source Industry - credit bureau data; Discover – internal data Source Credit bureau data, Discover analysis |
47 We are on track to deliver targeted returns Net Interest Income Loss Provision Operating Expenses Target ROA 9% (4%) (2%) 3% Targeted Personal Loan Returns (1) Note(s) 1. Over life of loan |
48 Personal loans is positioned for profitable growth • Targeting receivables growth of 20-25% in 2011 while maintaining credit quality • Increase product awareness • Penetrate deeper into broad market population • Expand into pertinent segments – Smaller loan size – Shorter duration • Develop affinity partnerships |
49 Discover Student Loans |
50 Higher education is a good investment Income by Education Level ($000) (1) Unemployment Rates (1) Note(s) 1. Age 25 and over; based on highest degree obtained National Average 9% 14% 10% 8% 4% No High School Diploma Associate or Some College Bachelor's Degree or Higher High School Graduates Sources U.S. Census, Current Population Surveys 2008 Sources U.S. Bureau of Labor Statistics, January 2011 Note(s) 1. Based on highest degree obtained 21 31 33 40 59 71 100 125 Not a high school graduate High school Some college Associate's Bachelor's Master's Doctorate Professional |
51 Enrollment and costs continue to increase Average Annual College Cost (1) ($K) Note(s) 1. Average published tuition, fees, room and board in current dollars Sources College Board, Trends in College Pricing (2010); National Center for Education Statistics, Enrollment in Postsecondary Institutions (‘07-’09) Total College Enrollment (MM) $17.8 $18.8 $19.3 2007-2008 2008-2009 2009-2010 18.7 19.6 21.0 2007-2008 2008-2009 2009-2010 CAGR: 6% CAGR: 4% Sources College Board, Trends in College Pricing (2010); National Center for Education Statistics, Enrollment in Postsecondary Institutions (‘07-’09) |
52 Private loans are an important source of educational funding Target Market for Private Loans 2010 Sources of Educational Funding ($Bn) Private Loans $8 Personal Funds $198 Grants and Other $103 Federal Loans $97 Total: $406Bn Source College Board, Trends in Student Aid (2010) Cost of Attendance Household Income Target Market |
53 Private student loans are an attractive business • Students and parents need private loans to supplement other sources of aid as education costs continue to rise • Private student loans have better features and consumer protections than other types of unsecured loans • Student loans are an asset with long duration and relatively low credit losses • Top 5 lenders account for significant market share and benefit from scale • Students are an upwardly mobile customer base |
54 Our approach provides strong value to students, parents and schools Students & Parents 100% Solution Private education loans for students at 4-year colleges and graduate schools, up to the cost of attendance Simplicity Easy application and repayment processes and assistance as customers enter repayment Rewarding 2% Graduation Reward and periodic extras Schools Reliable Stable and consistent, providing industry-leading service Responsible Responsible lending at every step of the process Flexible Support for school processing preferences |
55 Compelling value proposition drives customer satisfaction Recommend to a Friend Satisfaction with Loan Provider 0% 10% 20% 30% 40% 50% 60% 70% 80% Discover Chase Wells Fargo Sallie Mae 0% 10% 20% 30% 40% 50% 60% 70% 80% Discover Chase Wells Fargo Sallie Mae Source Milward Brown 2011; based on Discover originated loans Source Milward Brown 2011; based on Discover originated loans |
56 Disciplined underwriting is critical to profitability Origination FICO Distribution • Proprietary underwriting / scoring models • Only 4-year colleges and graduate schools • High co-signer rate • School selection based on low government default rates • 100% school certified • 100% disbursed through school 4% 11% 20% 25% 27% 13% < =690 720 750 780 810 > 810 Source 2010 Discover originations |
57 Early credit performance consistent with expectations Cumulative Lifetime Loss Rate Loss as % of Original Balance 0% 2% 4% 6% 8% 10% 12% 14% 16% 1 3 5 7 9 11 13 Years in Repayment Sallie Mae Traditional Discover 3.20% 2.68% 4.30% 3.40% 0-12 13-24 Months in Repayment Sallie Mae Traditional Discover Source Sallie Mae 4Q10 Investor Presentation, Discover analysis Source Sallie Mae 4Q10 Investor Presentation, Discover analysis |
58 We are on track to deliver targeted returns Net Interest Income Loss Provision Operating Expenses Target ROA 5% (1%) (1.5%) 2.5% Targeted Student Loan Returns (1) Note(s) 1. Over life of loan |
59 The Student Loan Corporation acquisition strengthens Discover Student Loans • Diversifies Discover loan portfolio at attractive returns • Enhances competitive position with combined entity expected to be a top 3 originator of private loans • Adds scale in servicing, capacity and expertise • Increases product breadth to meet a larger set of customer needs and expands lifecycle marketing opportunities • Complements network of school relationships and online properties • Deepens proprietary underwriting capabilities 2009-2010 Disbursements ($Bn) DFS $0.4 $0.6 SLC $0.8 $2.0 $2.3 Sallie Mae Wells Fargo Discover Chase $1.2 Source Student Lending Analytics (2010), College Board, Trends in Student Aid (2010) |
60 We acquired a seasoned portfolio with attractive characteristics and scale 75% Loans in repayment 74% Loans with co-signer 724 Average FICO 83% ABS funding $4.2Bn (1) Total assets The Student Loan Corporation Note(s) 1. Represents book value as of 11/30/10 |
Acquisition expanded penetration among target schools SLC 350 Discover is on Preferred Lender List at 1150 of 1350 Target Schools Target Schools Top School Penetration (1) 200 • 83% of top 100 colleges • 91% of top 50 Business schools • 90% of top 50 Law schools • 87% of top 50 Medical schools Note(s) 1. Incorporates US News Rankings, 2010 DSL 250 550 61 |
62 Leading online presence www.wellsfargo.com www.chasestudentloans.com www.salliemae.com www.studentloan.com #14 #8 #2 #1 Google Unpaid Search Return Rankings Keyword “Student Loan” Source www.google.com, March 2011 |
63 Student loans is positioned for profitable future growth • Integration of The Student Loan Corporation is on track • Targeting net receivable growth of $1Bn+ in 2011 • Strong pipeline of repeat business • Competitive product set with opportunities for expansion • Increased marketing to Card customer base and new affinity partnerships |
64 Consumer banking businesses have matured and are well positioned for future expansion • Achieved robust growth in Consumer Lending and Deposits - ~$21Bn in direct-to-consumer deposits - ~$7Bn in consumer lending receivables • Extended the Discover Brand beyond credit cards • Attained profitability and established a solid foundation for growth • Capitalized on shifting market dynamics and consumer behaviors |
Exploiting the payments opportunity Diane Offereins President Payment Services CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
66 Delivering growth in all three payment networks Domestic acceptance network for Discover proprietary cards and partner issuers • $103Bn volume • 30+ issuers Domestic PIN debit network with global ATM acceptance • $118Bn volume • 4,400+ issuers • 783,000 ATMs • 80+ countries Global payments network targeting upscale customers, frequent travelers and corporate clients • $27Bn volume • 80+ licensees • 185 countries and territories Note(s) Based on the trailing four quarters ending 4Q10 Volume Change (YOY) +6% +6% +8% +8% +4% +4% |
67 Momentum - strong increase in volume and profits $141 $107 $81 $37 $29 2006 2007 2008 2009 2010 91 96 70 86 106 109 118 13 $163 $186 $221 $232 $248 90 94 96 7 6 6 5 3 26 27 2006 2007 2008 2009 2010 Volume Growth (Bn) Payment Services PBT (MM) Partner Issuance Proprietary 2006 – 2010 CAGR: 48% 2006 – 2010 CAGR: 11% |
68 Growth initiatives for 2011 and beyond Primary efforts include • Increase acceptance and volume – U.S. efforts – Invest in global acceptance – Increase partner issuance volume • PULSE – address regulatory disruptions • Continue to grow Diners Club • Increase global footprint through alliances • Focus on alternative payment solutions and innovative technologies |
69 The last mile - Discover acceptance in the U.S. • Accelerating growth of 30 day active merchants • Increased volumes on the Discover Network • Closing the gaps – Industry partners – High impact merchant focus – Awareness • Success with merchant partners Domestic Focus Merchant Outlet Coverage (1) Source Internal data 76% 86% 92% 96% 97% 2006 2007 2008 2009 2010 Note(s) 1. U.S. points of sale enabled for Discover acceptance per Discover internal analytic study |
Building the future - investing in global acceptance • Significant investments are being made related to global acceptance • Utilizing hybrid acceptance model for accelerated global growth • Implementation of multiple partnerships with acquirers and franchises Global Focus Global Merchant Acquirers 70 |
Cultivating partner volume on the networks • Volume growth driven by: – GE / Wal-Mart / Sam’s Club – HSBC – International agreements • New business pipeline continues to grow • Prepaid strategy that is driven by campus, incentive and promotional cards leveraging our unique network assets • Announced new relationship with First National Bank of Omaha Partner Issuance Network-to-Network 71 |
72 PULSE - continued strong growth in 2010 3.3 2.9 2.7 2.3 1.9 2006 2007 2008 2009 2010 Transactions (Bn) 2006 – 2010 CAGR: 15% Volume ($Bn) $118 $109 $106 $86 2007 2008 2009 2010 2007 – 2010 CAGR: 11% |
Implications of the Durbin amendment • Changes in network participation requirements expected to result in redistribution of PIN debit volume • PULSE positioned to on-board issuers that need to add an unaffiliated debit network • Increasing capacity to address potential demand 73 |
Strategic Initiatives PULSE® Internet PIN Debit • Continue to invest in leading products and technology • Expand international and domestic ATM acceptance • Support issuers in responding to changing landscape • Continue to focus on cost management and efficiency initiatives • Implement the next generation of world class infrastructure • Available network-wide October 25, 2010 • Delivers economic benefits to both issuers and acquirers as compared to signature debit • Secure payment method • Ease of use PULSE – seizing opportunities 74 |
75 Diners Club – on track to deliver long-term value Strategic plans • Invest in product development efforts • Add franchises • Help franchises build stronger value propositions |
76 Building a global brand that feels exclusive Strategic directions • Continuing to re-invigorate brand • Expand global advertising and extend growth incentives • BELONG campaign |
Partnering in alternative payments and technology • Explosive growth in mobile devices has cultivated the demand for innovative payment methods and services • Focus on new ways to facilitate credit, debit and alternative transactions • Grow consumer base beyond the “tech forward” crowd 77 |
• On the path of reinvention • Focusing on collaboration • Embracing innovation • Addressing a changing landscape • Seizing opportunities A globally diversified payments business 2011 and Beyond 78 |
Delivering shareholder value through strong financial performance Roy Guthrie Chief Financial Officer CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
80 Financial performance ($ MM, except per share data) 1Q11 1Q10 Net Interest Income $1,170 $1,145 $25 Other Operating Revenue 563 546 17 Total Revenue $1,733 $1,691 $42 Net Charge-offs $689 $1,082 ($393) Reserve Changes build/(release) (271) 305 (576) Provision for Loan Loss $418 $1,387 ($969) Total Operating Expense $595 $475 $120 Pretax Income $720 ($171) $891 Net Income (Loss) $465 ($104) $569 EPS $0.84 ($0.22) $1.06 ROE 28% -6% NM Total Average Receivables $51,488 $51,555 ($68) Net Interest Margin 9.22% 9.01% 21bps YOY Change |
81 Improving credit fundamentals with stable revenues… Net Interest Margin (%) (1) Revenues (2) Note(s) 1. Defined as net interest income (annualized) divided by average total loans for the period 2. Defined as revenue before rewards expense less interest expense for Direct Banking segment 3. Defined as revenue before rewards expense less interest expense and charge-offs for Direct Banking segment 9.2% 9.3% 9.2% 9.1% 9.0% 1Q10 2Q10 3Q10 4Q10 1Q11 900 797 689 $1,792 $1,769 $1,837 $1,730 710 768 938 933 1,173 1,001 1,082 $1,862 1Q10 2Q10 3Q10 4Q10 1Q11 Net Credit Revenue Charge-offs (3) |
82 … partially offset by higher investment spending… $413 $416 $435 $469 $459 1Q10 2Q10 3Q10 4Q10 1Q11 131 150 136 $252 $272 $325 $352 $342 167 174 194 202 206 98 85 1Q10 2Q10 3Q10 4Q10 1Q11 Rewards Mkt & Bus. Development Core Operating Expenses (1) Investment Spending Note(s) 1. Represents total company “other expenses” excluding marketing and business development 2. Excludes 1Q10 credit related to settlement 3. Excludes one-time SLC transaction expenses Source Total Company Source Total Company (2) (3) |
0% 2% 4% 6% 8% 10% 1Q05 3Q06 1Q08 3Q09 1Q11 … with expectation for continued credit improvement driving reserve releases Credit Card Delinquency Rates (%) Credit Card Net Charge-off Rate (%) Note(s) Data prior to 1Q10 have been adjusted for FAS 166/167 ~$400MM / Quarter $1.1Bn Reserve Releases 0% 1% 2% 3% 4% 5% 6% 1Q05 3Q06 1Q08 3Q09 1Q11 30+ Delinquency Rate 90+ Delinquency Rate 83 |
84 $459 $347 $258 $185 ($122) 1Q10 2Q10 3Q10 4Q10 1Q11 Profits drive further improvement in balance sheet flexibility Net Income to Common Stockholders Note(s) 1. Defined as tangible common equity to tangible assets; see appendix for reconciliation TCE Ratio (1) 8.1% 9.1% 9.5% 10.0% 10.2% |
85 4Q10 Tier 1 Common Ratio 8.6% 8.8% 9.8% 11.0% 11.1% 11.4% DFS AXP C JPM COF BAC Source SNL, Regulatory Reports dated 12/31/10 Regulatory implications for capital Pro forma Basel III Ratios (1) Ratios Proposed Minimum DFS Consolidated (2) Tier 1 Common 7.0% 10.8% Tier 1 RBC 8.5% 10.8% Total RBC 10.5% 14.1% Tier 1 Leverage (3) 3.0% 7.9% Note(s) 1. Preliminary view based on December 2010 Basel Committee guidance, subject to change 2. 12/31/10 estimates for deferred tax assets (DTA); assumes that the two year carryback is allowed and the portion of DTA realized as a result of future profitability is capped at 10% of common equity 3. Assets include 10% of the $163Bn undrawn credit card lines |
86 $5.0 $1.4 1Q11 Illustrative Target Excess Capital Excess capital deployment Tangible Common Equity (1) (Bn) Note(s) 1. See appendix for reconciliation 2. Certain potential uses subject to regulatory approval 8%+/- Target Potential Uses of Excess Capital (2) • Dividend actions • Organic growth • Acquisitions • Share repurchase |
87 Summary • Stable revenue with improving credit trends is driving increased net credit revenues and reserve releases • These benefits will be partially offset by investment spending to drive future growth • Resulting growth in earnings provides balance sheet flexibility – Dividend restored – Evaluating excess capital alternatives |
2011 Financial Community Briefing Using our Direct Banking and Payments assets to deliver profitable growth CONSUMER CONSUMER DEPOSITS DEPOSITS DISCOVER DISCOVER CARD CARD CONSUMER CONSUMER LOANS LOANS PULSE PULSE DEBIT DEBIT NETWORK NETWORK DINERS DINERS CLUB CLUB INTERNATIONAL INTERNATIONAL DISCOVER DISCOVER NETWORK NETWORK |
89 Appendix |
90 Reconciliations ($MM) 2/28/10 5/31/10 8/31/10 11/30/10 12/31/10 2/28/11 Tangible Common Equity Ratio Calculation: Total Common Equity (TCE) 5,854 6,038 6,111 6,457 6,565 6,899 Less: Goodwill and Intangibles (449) (448) (446) (444) (448) (449) Tangible Common Equity 5,405 5,590 5,665 6,013 6,117 6,450 Total Assets 66,819 62,154 60,058 60,785 63,550 63,506 Less: Goodwill and Intangibles (449) (448) (446) (444) (448) (449) Tangible Assets (TA) 66,370 61,706 59,612 60,341 63,102 63,057 TCE/TA Ratio 8.1% 9.1% 9.5% 10.0% 9.7% 10.2% Note(s) Tangible common equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use TCE and definitions may vary, so we advise users of this information to exercise caution in comparing TCE of different companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful valuation to investors of the true net asset value of the company. |