Barclays Capital Americas Select Conference Harit Talwar President, U.S. Cards May 24, 2011 Exhibit 99.1 |
2 Notice www.discoverfinancial.com. Certain reconciliations are also included at the end of this presentation. 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 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 and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Company’s Form 10-Q for the quarter ended February 28, 2011, 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. 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. |
Leverage our Direct Banking and Payments assets to deliver profitable growth CONSUMER DEPOSITS DISCOVER CARD CONSUMER LOANS PULSE DEBIT NETWORK DINERS CLUB INTERNATIONAL DISCOVER NETWORK |
4 Unique collection of well positioned assets Note: Balances as of February 28, 2011; volume based on the trailing four quarters ending 1Q11 • $44Bn in receivables • Leading cash rewards program • 1 in 4 U.S. households • $22Bn consumer deposits • $7.3Bn personal and student loans Deposits and Other Lending Deposits and Other Lending U.S. Card Issuing U.S. Card Issuing • $125Bn volume • 4,400+ issuers • $104Bn volume • 30+ issuers • $28Bn volume • 50+ franchises • 185 countries / territories |
5 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 |
6 Discover Card - 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 • Outperforming large general purpose card issuers over the last two years (1Q09-1Q11) Note(s) 1. Comparison based on “managed basis” receivables at March 31, 2009 2. Calendar year data for sales and receivables 3. Includes BAC, C, COF, and JPM Source Internal data and company filings • Strong growth in new accounts • Increasing usage and wallet share with existing customers Sales Receivables (1) 1Q11 NCO Rate Discover (2) +14% -10% 5.96% Peer Average (3) +8% -20% 7.25% |
7 79% 79% 72% 72% 72% 71% DFS AXP JPM C BAC COF Recommend to a Friend (1) Source 4Q ‘10 Brand Tracker study, Millward Brown Note(s) 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 Discover brand resonates strongly with attractive customer base Customer Base & Target Profile Large, seasoned customer base Large, seasoned customer base • Highest average tenure in industry • Balanced customer base – ~40% revolver / 60% transactor • Geographically diverse • Avg. age 44; avg. HHI $108K • 75% married • 74% attended college • 85%+ own their home |
8 Leading rewards programs driving record levels of customer engagement 67% 42% 33% 29% 23% 18% DFS JPM AXP C COF BAC Best Cash Rewards (1) Rewards Program Enrollment (MM) Source 4Q 2010 Brand Tracker study, Millward Brown Note(s) 1. % of unaided cardmembers who identify the brand with the statement “best cash rewards”; among cardholders who say they use that brand’s card most often to make purchases 14 18 23 2008 2009 2010 |
9 Acceptance and marketing programs driving usage and sales Sales Impact ($Bn) (2) $3.4 $2.4 $1.4 2008 2009 2010 Source Internal data Note(s) 1. U.S. points of sale enabled for Discover acceptance based on internal analysis 2. Estimation based upon previously non-accepting and accelerated sign-up of new merchants Merchant Outlet Coverage (1) 76% 86% 92% 96% 97% 2006 2007 2008 2009 2010 |
10 Significantly increasing brand presence 6% 11% Historical 2010 7% 20% Historical 2010 Share of Media Spend (1) Share of Voice (2) Source Nielsen 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 (3) (3) |
11 Off-Us On-Us Loans Discover Opportunity for growth and proven ability to take wallet share 2008 2010 Wallet Share of Loans 16% Sources Internal calendar year data and public company data Note(s) Loans – Credit bureau data and internal modeling “On-Us” represents activity with Discover Card; “Off-Us” represents activity by Discover Cardmembers with other competitors Wallet Share is the amount of customer loans with Discover vs. other cards in the wallet; share based upon credit bureau data and internal modeling |
12 Personal Loans – natural adjacency with attractive returns Origination by Credit Score Industry Discover 0% 10% 20% 30% 40% 50% 501- 600 601- 700 701- 800 801- 900 901- 990 Source Industry - credit bureau data (Vantage); Discover based on analysis of 2010 originations Select 1Q11 Stats Personal Loans, ending $2.0Bn Growth (YOY) 40% Loan Size, avg. $16k % with Discover Card ~75% Targeted Returns Net Interest Income 9% Loss Provision (4%) Operating Expenses (2%) Target ROA 3% Overview |
13 Overview Private Student Loans – strong growth in an attractive business Note(s) 1. Federal student loan portfolio is held-for-sale as of 11/30/10 and thereafter 2. Includes The Student Loan Corporation purchased credit impaired loans and 1Q11 disbursements Student Loan Growth ($Bn) 0.6 1.0 4.5 $0.3 $1.9 $1.8 $5.3 0.8 0.8 1.3 0.2 0.1 2008 2009 2010 1Q11 Federal Private • Asset class with long duration and relatively low credit losses • Conservative underwriting approach with high co-signer rate and FICO • Acquisition of SLC diversified total company portfolio • Expect to be top 3 originator of private student loans in 2011 • Students are an upwardly mobile customer base offering important cross-sell opportunity (1) (2) |
14 Acquisition expanded penetration among target schools SLC 350 Discover is on Preferred Lender List at 1150 of 1350 Target Schools Target Schools 200 DSL 250 550 Top School Penetration (1) • 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 U.S. News & World Report - Best Rankings for 2010 |
15 Private student loans are on track to deliver targeted returns Net Interest Income Loss Provision Operating Expenses Target ROA 5% (1%) (1.5%) 2.5% Targeted Returns • Integration of The Student Loan Corporation is on track • Targeting net receivable growth of $1Bn+ in 2011 • Strong pipeline of repeat business • Competitive product set with opportunities for expansion • Increased marketing to Card customer base and new affinity partnerships |
16 Payment Services – double-digit volume and profit growth Volume Growth ($Bn) Pre-tax Profit ($MM) Partner Issuance Proprietary 2006 – 2010 CAGR: 48% 2006 – 2010 CAGR: 11% 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 $141 $107 $81 $37 $29 2006 2007 2008 2009 2010 |
17 PULSE – large player and gaining share 3.3 2.9 2.7 2.3 1.9 2006 2007 2008 2009 2010 Transactions (Bn) 2006 – 2010 CAGR: 15% Overview • #3 market share in PIN debit (1) • Strong transaction and volume growth • Expanding international and domestic ATM acceptance • Durbin - changes in network participation requirements may result in redistribution of PIN debit volume Note(s) 1. Based on internal analysis which used the following sources: EFT Data Book, Federal Reserve and SEC Filings |
18 • Complementary networks with strong global presence • Expanding merchant coverage • Operates in over 185 countries / territories • Over 780,000 ATMs in more than 80 countries Global acceptance footprint Note(s) 1. North America includes U.S., Canada, Mexico & Caribbean North America North America (1) (1) 8.1 MM 8.1 MM EMEA EMEA 2.0 MM 2.0 MM Latin America Latin America 2.3 MM 2.3 MM Asia Pacific Asia Pacific 6.2 MM 6.2 MM |
19 Global relationships are a competitive advantage Merchants Acquirers Networks Issuers |
20 Financial performance ($ 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 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 ROE 28% -6% NM Total Average Receivables $51,488 $51,555 ($68) Net Interest Margin 9.22% 9.01% 21bps YOY Change |
21 Capital position provides flexibility Note(s) 1. Tangible common equity to tangible assets; see appendix for Discover reconciliation 2. See appendix for reconciliation $5.1 $1.4 3/31/11 Illustrative Target Excess Capital Tangible Common Equity (2) (Bn) 8%+/- Target 10.2% 1Q11 TCE / TA Ratio (1) 10.2% 9.4% 7.2% 7.1% 6.0% 5.6% DFS AXP C COF BAC JPM Source SNL, Regulatory Reports dated 3/31/11 |
22 Concluding themes • Card business generating strong profitability – Credit trends provide flexibility to invest for growth – Leveraging brand, acceptance and risk management capabilities to increase wallet share • Have continued to diversify our portfolio with the acquisition of The Student Loan Corporation and expansion of personal loans – Other consumer lending receivables are now ~15% of total receivables – Leveraging unsecured lending and marketing capabilities to drive more rapid asset growth at attractive returns • Focused on increasing acceptance globally and exploiting opportunities in debit and mobile – Targeting Payment Services long-term profit growth of 15-20% with 10%+ volume CAGR • We continue to generate excess capital and were one of the first U.S. financial services companies to restore the dividend – Excess capital provides significant flexibility |
Using our Direct Banking and Payments assets to deliver profitable growth CONSUMER DEPOSITS DISCOVER CARD CONSUMER LOANS PULSE DEBIT NETWORK DINERS CLUB INTERNATIONAL DISCOVER NETWORK Harit Talwar President, U.S. Cards May 24, 2011 |
24 Reconciliations ($MM) 3/31/11 Tangible Common Equity Ratio Calculation: Total Common Equity (TCE) $7,002 Less: Goodwill and Intangibles (448) Tangible Common Equity $6,554 Total Assets $64,405 Less: Goodwill and Intangibles (448) Tangible Assets (TA) $63,957 TCE/TA Ratio 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. |