2012 Financial Community Briefing March 22, 2012 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 includes certain non-GAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included at the end of this presentation, in the Company's Annual Report on Form 10-K for the year ended November 30, 2011 and/or in the Company's Current Report on Form 8-K dated March 21, 2012, each of which is available on the Company's website at www.discoverfinancial.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 – 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, 2011 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 Agenda Building on Discover’s successful strategy David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER Achievements and strategic priorities Roger Hochschild PRESIDENT & CHIEF OPERATING OFFICER Building on our global network vision through partnerships Diane Offereins EVP, PRESIDENT - PAYMENT SERVICES Leveraging strong credit risk management Jim Panzarino EVP & CHIEF CREDIT RISK OFFICER Driving profitable card growth Harit Talwar EVP, PRESIDENT - U.S. CARDS Engaging customers with our direct banking model Carlos Minetti EVP, PRESIDENT - CONSUMER BANKING & OPERATIONS Delivering shareholder value through rigorous financial management Mark Graf EVP & CHIEF FINANCIAL OFFICER Closing remarks and Q&A David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER |
2012 Financial Community Briefing David Nelms Chairman & Chief Executive Officer |
5 Our Direct Banking and Payments strategy is delivering profitable growth • Increasing acceptance globally and exploiting opportunities in payments – New network/acquirer/issuer partnerships driving acceptance and volume – Aggressively pursuing alternative payments • Growing receivables, sales and profits in card – Using brand, service and rewards competitive advantages to grow wallet share – Leveraging credit risk management capabilities to maximize returns • Diversifying our lending portfolio – Applying unsecured lending and marketing capabilities to drive asset growth – Generating attractive risk-adjusted returns from student and personal loans • Deploying excess capital to drive shareholder value |
6 Becoming the leading direct banking and payments company Payment Services • Third-party credit • Debit • Global T&E • Network-to-network • Prepaid • Emerging payments Direct Banking • Credit card • Student loans • Personal loans • CDs & savings • Home loans • Checking |
7 • $143Bn volume • 4,300 issuers • 840k+ ATMs • $113Bn volume • 30+ issuers • $29Bn volume • 80+ licensees • 185 countries / territories Payment Services Payment Services Well positioned across all businesses Note(s) Balances as of February 29, 2012; volume based on the trailing four quarters ending 1Q12 • $46Bn in receivables • Leading cash rewards program • 1 in 4 U.S. households • $10Bn personal loans and private student loans • $27Bn direct-to-consumer deposits Other Lending and Deposits U.S. Card Issuing Direct Banking Direct Banking |
2012 Financial Community Briefing Roger Hochschild President & Chief Operating Officer |
9 • Delivered record profits – $2.2 billion net income with ROE of 30% • Drove record network sales volume – $280 billion volume with growth of 13% YOY • Achieved all-time low delinquency rate of 2.30% – 159bps decrease in 30+ delinquency YOY • Returned to growth in card receivables – 3% growth YOY in card receivables • Closed two private student loan acquisitions – ~$6 billion of private student loans through acquisitions • Continued success in direct-to-consumer deposit funding – $26 billion in direct deposits, up 27% YOY • Focused on capital / liquidity / funding – Increased dividend and implemented share repurchase program FY 2011 – Another year of significant accomplishments Note(s) Figures as of 11/30/11 |
10 57% 36% 28% 72% Direct Banking is the future Preferred Banking Method Direct Channels 2007 2011 2007 2011 Source American Bankers Association, August 2007 & September 2011 • Exploit advantages vs. traditional banks – Consumer preference shifting to direct channels – Cost advantage, especially in extended low-rate environment • Leverage card-built position and capabilities – Strong brand / large loyal customer base – Industry-leading unsecured underwriting – Direct acquisition / servicing capabilities Branches / ATM |
11 • Uniquely positioned global competitor – Broad product suite including debit, credit, prepaid and ATM – Direct merchant relationships – Global acceptance expansion • Alternative strategy and flexibility provides opportunity vs. key competitors – Brand “ownership” for Diners Club franchisees – Network-to-network alliances – Emerging payments Payment Services growth strategy $37 $166 2007 2011 Payment Services Pre-Tax Profits ($MM) 2007 – 2011 CAGR: 46% |
12 Discover card • Grow sales and loans through expanding wallet share and new accounts • Expand partnerships, advertising, rewards and online/mobile presence to enhance brand and customer usage • Enhance customer service delivery and capabilities Banking products • Increase private student loan originations • Grow personal loans with strong credit and profit performance • Launch direct checking • Complete acquisition of Home Loan Center business and launch Discover Home Loans 2012 Direct Banking strategic priorities |
13 Payments • Accelerate growth of US and international merchant acceptance • Build global volume through new and expanding network and issuer partnerships • Focus on alternative payments, including mobile Overall • Ensure disciplined expense management and drive efficiencies • Effectively deploy capital to maximize shareholder value 2012 strategic priorities for profitable growth |
2012 Financial Community Briefing Diane Offereins EVP, President - Payment Services |
15 Leverage our unique combination of assets and our partnerships to deliver growth • Improve domestic and international merchant acceptance – Accelerate acceptance growth through open acquiring model with key partners – Aggressively close remaining gaps domestically and internationally • Build network volume through new and expanding partnerships – Drive volume for key partners by leveraging direct merchant relationships – Provide strategic alternative to legacy payment network model through network-to-network alliances – Manage through debit industry changes to achieve future profitable growth – Strengthen Diners’ presence in key markets and add new, high impact franchises • Continue to invest in alternative payments and mobile – Partner with multiple players to help shape the landscape – Develop relevant, customer-centric solutions Building on our global network vision through partnerships |
16 Network expansion with key signing of RuPay Facts about RuPay Phased Approach Source 2012 Discover – National Payments Corporation of India (NPCI) announcement • Created by the Reserve Bank of India, now owned by the ten largest banks in India • Currently switch 95% of ATM transactions in India from approximately 90K ATMs • Relationships with 63 member banks • Discover and Diners Club (DCI) cards to be accepted at RuPay ATMs (3Q12) • Discover and DCI cards to be accepted at RuPay POS locations (1Q13) • RuPay Global Cards on Discover, DCI and PULSE payment networks (2Q13) |
2007 2011 / 2012 Payment Services – delivering on our strategy • Domestic-only network • $186Bn volume • $37MM PBT • 265,000+ ATMs • 7MM+ acceptance locations • Settled in 1 currency • Global payments network • $281Bn volume (1) • $166MM PBT (1) • 840,000+ ATMs • 19MM+ acceptance locations • Settle in 27 currencies Owned Network Alliances Note(s) 1. FY 2011 data 17 |
18 96 104 86 106 109 118 140 13 26 $186 $221 $232 $248 94 96 91 8 7 6 6 5 27 29 $281 2007 2008 2009 2010 2011 $37 $81 $107 $141 $166 2007 2008 2009 2010 2011 Continue to deliver growth in volume and profit Volume Growth ($Bn) Payment Services PBT ($MM) 2007 – 2011 CAGR: 46% 2007 – 2011 CAGR: 11% Partner Issuance Proprietary |
19 2007 2011 Active Outlet Growth 2011 Highlights Significant gains in U.S. acceptance in 2011 • 40%+ increase since moving to open acquiring model • Record levels of 30-day active merchants in 7 of 12 months in 2011 • Fueling growth in key merchant awareness measures 2012 Priorities • Enhance acquirer sales channel efforts • Increase direct engagement with small merchants • Close key acceptance gaps with national / regional merchants • Roll out EMV strategy 2007 – 2011 CAGR: 7% |
20 Acceptance promotes volume growth Discover Prepaid Network Alliances +8% • New acceptance points are providing a significant contribution to overall network growth +12% • Significant growth in young adults market – 317% growth in campus programs – Award winning programs (2) Most Effective Prepaid Marketing (Campus) Best Youth Prepaid Program +12% +122% 2011 Launch • 8 issuers • >1.2MM cards 2012 Launch • RuPay ATMs (3Q12) 2011 Growth (1) Note(s) 1. Year-over-year 2. 2012 PayBefore Excellence Awards |
21 Marketing drives acceptance and usage |
22 And benefits network–to–network alliances |
23 Building momentum in international acceptance Dec ’10 Sep ’11 Jan ’12* Oct ’11 Feb ’12 Apr ’10 Note(s) * Agreement contingent on approval of French privacy regulator Source 2012 Nilson Issue #989 Sep ’11 Nov ’11 |
24 PULSE - continued strong growth in 2011 Transactions (Bn) Volume ($Bn) 2007 – 2011 CAGR: 13% 2007 – 2011 CAGR: 13% 2.3 2.7 2.9 3.3 3.8 2007 2008 2009 2010 2011 $86 $106 $109 $118 $140 2007 2008 2009 2010 2011 |
25 Adding Issuers • First step in growing volume and revenue • In 2011, PULSE added 129 new direct issuer participants Navigating industry changes to drive profitable volume growth Other Factors • Competitors’ new debit strategies may negatively impact volume • Merchant / Acquirer routing sophistication • Industry pricing changes • Debit strategy for EMV acceptance Influencing Transaction Routing • Routing decisions by merchants and acquirers will drive volume • Short-term acquirer agreements have produced volume capture • Disciplined approach to routing incentives |
26 Delivering management reporting and customer analytics Augmenting fraud mitigation tools and support services Providing participant resources for debit regulations Diversifying and enhancing product offerings Enhancing customer value |
27 • New franchise partnerships formed in key growth markets • Pursuing new partnerships in China and Turkey • Majority of Western European franchises transferred to new and engaged ownership (India) (Russia) Diners Club – building strong relationships |
28 First Discover card launched outside of U.S. • Diners Club Ecuador is the first franchise to issue Discover card internationally • Launched on March 5 with a national TV campaign • Response and approval rates exceeding expectations Highlights Discover International |
29 Helping shape the emerging payments landscape Consumers Merchants Issuers DFS Leveraging the network for new technology solutions • NFC acceptance parity • 90+ EMV initiatives worldwide and 1.1MM cards in market • Relationships: Google, PayPal, Isis, C-SAM • Security: Certification with the top 3 Trusted Service Managers (TSMs) Leveraging the network for non-traditional payments • White label services: 65% growth (Bill Me Later) • B2C prepaid: Campus payment + identification / access function • B2B prepaid: PreCash leveraging Discover’s network rails • Security: Acculynk, Obopay, SecureKey |
30 • Improve domestic and international merchant acceptance • Build network volume through new and expanding network and issuer partnerships • Continue to invest in alternative payments and mobile 2012 and moving forward Payments strategy – delivering on the promise of growth |
2012 Financial Community Briefing Jim Panzarino EVP & Chief Credit Risk Officer |
32 Delivering strong credit performance across products • Focusing on disciplined growth and innovative credit assessment techniques • Blending analytics with high customer engagement • Leveraging card risk management capabilities to support growth in consumer loans • Targeting prime segment of the market in consumer loans • Investing in data, analytics and infrastructure to sustain credit performance |
33 Cards: sustained superior credit performance • Disciplined new bookings • Profitability-based line assignments • Proactive and targeted portfolio management • Innovative use of credit and behavioral data in decision making Net charge-off rate (%) Source SEC Filings, calendar year data 0% 2% 4% 6% 8% 10% 12% 2007 2008 2009 2010 2011 Discover Peer group (1) Note(s) 1. Includes Citibank, JP Morgan Chase, Capital One, American Express and Bank of America; weighted average |
34 Cards: sustained superior credit performance • Delinquencies continue to trend at historic lows • Expect losses to normalize below historical levels 30+ delinquency rate (%) Source Monthly Master Trust Data through February 2012 0% 1% 2% 3% 4% 5% 6% 7% 2007 2008 2009 2010 2011 201 Discover Peer group Note(s) 1. Includes Citibank, JP Morgan Chase, Capital One, American Express and Bank of America; simple average (1) |
35 Cards: restoring growth while managing risk Receivables ($Bn) 30+ Delinquencies ($Bn) 46.6 45.2 2010 2011 1.1 1.8 2010 2011 Source Fiscal year end figures While our receivables grew by $1.5 billion in 2011, our delinquencies went down $1.5Bn ($714MM) |
36 Cards: influencing customer behavior in innovative ways Driving payment preference • Targeted strategies to ensure payment preference reducing delinquencies • New data sources to get deeper insights into customers’ financial situations • Multiple approaches to create stronger influence on customers • Investment in operational processes and technology capabilities Note(s) Delinquencies are calculated three months prior to, and six months after contact Discover delinquency Other cards delinquency Prior Contact 6 Months after contact (64%) 11% |
37 Student loans: superior credit performance 2011 Net Charge-off rates Underwriting Approach Source Company filings for Sallie Mae, calendar-year figures for Discover 1.0% 2.9% DFS SLM • Card underwriting capabilities leveraged to enhance decision making • High cosigner rate – 90% (3) • High origination FICO – 750 (3) • Originations only in 4-year colleges and graduate schools • School certification and direct disbursement of funds to schools (1) (2) Note(s) 1. Defined as net losses to average managed contractual receivables which is a non-GAAP measure for DFS, see appendix for reconciliation 2. Defined as net losses to average receivables for the private education loan portfolio 3. Average cosigner rate and average FICO are for the organic portfolio as of the end of fiscal year 2011 |
38 Student loans: continuously improving portfolio performance 30+ delinquency ever (%) • Vintage credit quality improvement through use of proprietary models • Increased borrower engagement at repayment through communication strategies while still in school 1 2 3 4 5 6 7 8 9 10 11 12 Months in repayment 2009 vintage 2010 vintage Note(s) Analysis done on vintages booked in the second half of the respective fiscal year; Delinquency rates are measured as a percentage of original repayment vintage balance |
39 Personal loans: superior credit performance Prime originations Source Industry - credit bureau data; 10% sample. Discover – internal data Prime/Non-prime segmentation is done using Vantage score data. Originations are calendar year originations. Delinquency rates are as of calendar year-end 98% 52% 99% 51% Discover Industry 2010 2011 60+ Delinquency rates 1.0% 3.6% 0.6% 2.5% Discover Industry 2010 2011 |
40 Personal loans: effectively managing risk Charge-offs (%) • Disciplined new bookings • Multi-bureau data for complete customer profile • Judgmental underwriting with verification of income or employment • Strategy refinement to ensure convergence of the broad market and cross sell performance • Low charge off rates (3%) in 2011 1 2 3 4 5 6 7 8 9 10 11 12 Months on books 2009 Vintage 2010 Vintage Note(s) Analysis done on vintages booked in the first half of the respective fiscal year; Charge-off rates are measured as a percentage of original vintage balance |
41 Credit philosophy aligned to profitable growth • Investments in capabilities to assist customers through life cycle • Consistent customer experience by blending analytics with customer engagement • Ongoing evaluation of new data sources to deepen customer insights Data Analytics Infrastructure |
2012 Financial Community Briefing Harit Talwar EVP, President - U.S. Cards |
43 Competitive advantage delivering profitable growth • The card business has strong momentum: (1) – Loan growth is faster than competitors and we have increased market share by over 100bps – Customer base is growing from increasing new accounts and record low customer attrition – Wallet share with existing customers has increased by over 300bps • Leveraging and strengthening our competitive advantage – Rewards and partnerships – Acceptance – Online and mobile – Customer experience – Brand • Business model delivering attractive financial returns – Pre-tax ROA of 4.8% (excl. reserve actions) in 2011 Note(s) 1. All metrics are 4Q09 – 4Q11; competitors include weighted average card receivables growth for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excl. installment loans), Citi (Citi-branded N.A.), and JPMorgan Chase (Card Services excl. WaMu & Commercial Card) |
44 Delivering superior loan growth versus competitors -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 1Q08 4Q08 3Q09 2Q10 1Q11 4Q11 DFS (CY) Industry Loans (YOY) Note(s) 1. Includes weighted average card receivables growth for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excl. installment loans), Citi (Citi-branded Cards N.A.), and JPMorgan Chase (Card Services excl. WaMu & Commercial Card) Source Internal calendar year data and public company data (1) |
45 2009 2010 2011 New Accounts Portfolio Attrition Change in Customer Base Growing the customer base • 43% growth in new customers (1) – With 22% lower promotional balance transfers (2) • Average origination FICO: ~730 • Record low attrition New Customers & Attrition Note(s) 1. New active customers 2. Per account 3. Newly inactive, charged-off and closed existing accounts Source Internal fiscal year data 2009 - 2011 (1) (3) |
46 2009 2010 2011 Increasing card usage driving wallet share of loans Wallet Share of Loans Note(s) 1. Primary customers use their card at least 15 times a month 2. 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 Source Internal calendar year data and public company data 300bps • 8% growth in primary customers (1) • 13% growth in sales per active customer Source Internal fiscal year data 2009 - 2011 |
47 Leveraging and strengthening competitive advantage for growth • Rewards & partnerships • Acceptance • Online & mobile • Customer experience • Brand |
48 48% 29% 19% 12% 12% 8% DFS JPM AXP C BAC COF 68% 44% 34% 25% 24% 22% DFS JPM AXP COF C BAC A leader in cash rewards Best Cash Rewards (1) Cash Rewards Household Penetration Source 4Q 2011 Brand Tracker Study, Millward Brown Source 2011 TNS Study, State of the Credit Card Market Report Note(s) 1. % of cardmembers who identify the brand with the statement “best cash rewards” unaided; among cardholders who say they use that brand’s card most often to make purchases |
49 Customer Enrollments (MM) Record level of customer participation in reward programs 2009 2010 2011 Source Internal data 48% |
50 Discover Funded Partner Funded Customer Cash Rewards Customer Cash Rewards (2) Best in class rewards program Note(s) 1. For active accounts in good standing 2. Internal data for fiscal year 2011 • Core program – Cash rewards on every purchase, no expiration (1) , and no caps • Programs for earning more rewards – 5%, ShopDiscover, Discover Extras, and customized offers • Superior customer experience – Integration, control, and ease • Robust platform for partner programs – Over 300+ programs |
Integrated partnerships delivering value to cardmembers and merchants • Leverage largest Cashback program (1) – $1Bn cash rewards bank – 25% of U.S. households (2) • Unique point-of-sale experience for earning and paying with cash rewards Amazon Case Study Discover Sales at Amazon Program Start Note(s) 1. More U.S. households have a Discover card than any other cash rewards card 2. TNS 2011 Consumer Card Study Source Internal data Jan Dec 51 |
52 Redemption experience driving rewards leadership Redemptions ($) Easy to Redeem (1) Source Internal calendar year data Note(s) 1. % of respondents to the question “has rewards that are easy to redeem”; among cardholders who say they use that brand’s card most often to make purchases Source 4Q 2011 Brand Tracker Study, Millward Brown 2009 2010 2011 85% 83% 74% 65% 60% 52% DFS AXP JPM C BAC COF 23% |
Acceptance gains are driving sales Sales Impact ($Bn) (1) Note(s) 1. Estimate based upon sales from small merchants serviced through Discover’s merchant acquiring program 25%+ 2009 2010 2011 |
54 829 817 788 787 771 765 DFS AXP JPM COF C BAC JD Power Website Interaction Score (2) Source Internal fiscal year data Online leadership is core to our business Source J.D. Power and Associates, Credit Card Satisfaction Study 2011 Note(s) 1. Proportion of total sales and loans by account center registered cardmembers 2. J.D. Power Website Interaction Index is a composite of six weighted factors including speed of completing activity, ease of navigating website, appearance of website, range of services that can be performed, usefulness of information provided, and clarity of information provided. Total possible score = 1000 • Largest contact channel for customers and prospects – 85%+ of customer contacts are online • Preferred by best customers – Customers active on online channels are contributing ~ 80% of sales and loans (1) |
55 Convergence of online and rewards driving competitive advantage One-Click Enrollments Customer Control and Convenience ShopDiscover Personalized Redemption Recommendations 50% increase in customer visits ~65% of reward enrollments and redemptions occur online Source Discover 1Q12 year over year internal data Limitations apply |
Leveraging online to deliver unique interactive experiences Personalization Socially Driven Peer-to-Peer Spend / Debt Management Spend Analyzer Paydown Planner Purchase Planner Credit Health Check 56 |
57 2009 2010 2011 Discover Mobile Users (MM) Source Internal fiscal year data Rich functionality driving growth of our mobile platform Platform includes: • Account management • Targeted usage programs • mCommerce • mPayments Note(s) Unique cardmembers logging in to mobile site 87% |
58 Online / mobile will continue to drive the business • Cost efficiencies through self-service • Accelerate customer acquisition through re-designed platform • Increase wallet share through unique usage and reward programs • Increase share of online sales through partnerships • Mobile payments Driving Brand and Profitable Growth |
JD Power Customer Interaction Index (1) • Leveraging 100% U.S.-based employee customer service strategy • 36MM conversations delivering a 15% usage lift • Seamless experience across channels Customer experience leadership driving sales Source J.D. Power and Associates, Credit Card Satisfaction Study 2011 Click-to-chat Click to call Note(s) 1. 2011 Customer Interaction Index is a composite of four weighted factors including website interaction, live phone representative, automated phone system, and assisted online. Total possible score = 1000 821 819 778 773 760 750 DFS AXP JPM COF C BAC 59 |
Increasing brand presence through smart investments Source MediaCom Share of Media Spend / Voice 8% 17% Share of Spend Share of Voice 60 Note(s) Share of Spend = Discover media spend vs. AXP, BAC, C, COF, JPM, V, MA Share of Voice = Total Discover media impressions vs. AXP, BAC, C, COF, JPM, V, MA |
61 Strong brand momentum 87% 76% 73% 72% 70% 68% AXP DFS COF BAC JPM C 84% 82% 77% 75% 66% 65% AXP DFS JPM COF C BAC Recommend to a Friend (2008) Recommend to a Friend (2011) Source 4Q 2008 Brand Tracker Study, Millward Brown Source 4Q 2011 Brand Tracker Study, Millward Brown Note(s) Recommend to a Friend - % 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 |
62 52% 59% 66% 66% 26% 27% 23% 18% 16% 11% 14% 22% 2008 2009 2010 2011 Promotional Standard Cash and Other Profitable loan mix management Source Fiscal year ending data Credit Card Receivables Mix by APR (%) |
63 Competitive advantage delivering strong growth and profits Note(s) 1. Revenue margin includes net interest margin and other card-related revenues and fees net of rewards expense. Operating expense margin represents internally based allocation 2. Pre-tax, excluding reserve actions Growth Sales 8.3% 6.7% Loan 3.3% 3.6% P&L (1) Revenue Margin 14.1% 13.8% Net Charge-offs 4.5% 3.1% Operating Expenses 4.8% 4.7% ROA (2) 4.8% 6.0% 2011 1Q12 Card Business Model Performance |
64 Strong trajectory of growth and returns • The Card business has strong momentum: (1) – Loan growth is faster than competitors and we have increased market share by over 100bps – Customer base is growing from increasing new accounts and record low customer attrition – Wallet share with existing customers has increased by over 300bps • Leveraging and strengthening our competitive advantage – Rewards and partnerships – Acceptance – Online and mobile – Customer experience – Brand • Business model delivering attractive financial returns – Pre-tax ROA of 4.8% (excl. reserve actions) in 2011 Note(s) 1. All metrics are 4Q09 – 4Q11, except as noted below; competitors include weighted average card receivables growth for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excl. installment loans), Citi (Citi-branded Cards N.A.), and JPMorgan Chase (Card Services excl. WaMu & Commercial Card) |
2012 Financial Community Briefing Carlos Minetti EVP, President - Consumer Banking and Operations |
66 Direct banking expansion continues as planned Our strategy • Expand Discover card direct-to-consumer model into other financial products – Generate faster asset growth with enhanced profitability – Diversify funding sources and lower cost of funds – Deepen relationships with existing customers and capture greater financial share – Expand into new customer segments What we’ve accomplished • Established as top 5 in direct-to-consumer deposits, student loans and personal loans (1) – $27Bn in deposits – $11Bn in contractual receivables – Over 1 million consumer banking customers What lies ahead • Leverage platform to continue growth – Launch Discover Home Loans – Broaden product offerings in existing businesses – Invest in servicing capabilities and customer experience Note(s) 1. As of 2/29/12; contractual receivables are a non-GAAP measure, see appendix for reconciliation |
67 Offer choice and value with market leading products |
68 Customer centric approach driving successful direct banking expansion – Straightforward products – Clear expectations and ongoing status updates – Simple step-by-step account opening process – Personalized service experiences – Knowledgeable U.S.-based account managers – Easy-to-use online and mobile tools – Consistently competitive pricing – Rewards that make money go further – Responsible lending practices Value Service Simplicity |
Consumer deposits |
70 Established deposits as the core funding source Consumer Deposits (1) ($Bn) DFS Funding Sources (11/30/11) Consumer Deposits 45% Brokered Deposits 23% Asset Backed Securities 28% Other 4% $3.4 $6.1 $12.6 $20.6 $26.2 2007 2008 2009 2010 2011 Note(s) 1. AAA Affinity deposits are included as consumer deposits, but are classified as brokered deposits in FDIC call reports |
71 Source SNL, Fed Call Reports and Boston Consulting Group / internal analysis Operating Costs Net of Fee Income (1) Gained meaningful ground on cost-of-funds and all-in economics Deposit Rates (bps) 50 100 150 0 Other large bank non-interest expense (2) Discover non-interest expense 120 bps Deposit interest costs 600 450 300 150 0 Largest Banks (3) Discover Bank 2007 2008 2009 2010 2011 128bps (4) 239bps Source SNL Bps Note(s) 1. Total operating costs net of fee income divided by average total deposits portfolio balance 2. Total operating costs and fee income estimated based on public filings; Costs for other large-bank reduced by 100 bps to reflect impact of fee revenue. Discover's fee revenue on deposits is not material 3. Average of the top 25 U.S. banks; excludes the following: thrifts, investment banks, money processing banks, specialty finance companies, non continental US banks, and acquisition targets; analysis excludes banks missing financial data for the periods reported. 4. As of 4Q11 |
72 Compelling products and superior customer experience driving continued success Named “Best Savings Account” by MONEY Magazine in September 2011 (1) “Best Savings” Recognition New Tools for Customers “Mobile Banking Functionality” “Click to Chat” Note(s) 1. MONEY Magazine, September 2011 © Time Inc. MONEY is a registered trademark of Time Inc. and is used under License. MONEY and Time Inc. are not affiliated with, and do not endorse products or services of, Discover |
73 DTC deposits positioned to support customer needs and asset growth with improved all-in economics • Strategic pricing • Product mix optimization • Cross-sell and affinity focus 2012 Focus Strategic Priorities Portfolio Economics Customer Experience Product Expansion • Core banking infrastructure • Mobile and tablet capabilities • Online self-service • Online checking • IRA savings • Trust accounts |
Discover Student Loans |
75 Private student loans are a small but valuable source of funding for families 2011 Sources of Educational Funding Benefits of Private Student Loans • Addresses funding gaps in Federal loan programs • Parents as co-signers are involved in overall educational financial planning • 100% disbursement through schools limits overborrowing by students • Strong underwriting helps to promote responsible borrowing and mitigate potential losses Source College Board, Trends in Student Aid (2011); excludes family contribution totals Private Loans $6 Total: $235Bn Grants and Other $125 Federal Loans $104 |
76 Strong organic growth complemented by strategic portfolio purchases Private Student Loan Contractual Receivables ($Bn) (1) $7.8 $5.7 $0.6 $1.0 $0.1 $2.1 2007 2008 2009 2010 2011 Purchased Portfolios Organic <$0.1 Note(s) 1. Contractual receivables is a non-GAAP measure, see appendix for reconciliation |
77 Our student loans deliver a differentiated value proposition to students, parents and schools Schools Students & Parents Value Service Simplicity • Simple application and repayment processes • Informative online content • Zero origination fees • Competitive pricing • 2% Graduation Reward • Only major provider with 24/7 live customer service • Newly designed website and online application • Responsible lending at every step of the process • 100% school certified • Funds disbursed directly to schools • Dedicated school team • Ongoing commitment to student loans • Strong balance sheet • Support schools’ certification and disbursement preferences Responsible Reliable Flexible |
78 Source U.S. News and World Reports High customer satisfaction and increased top school penetration reflect value provided to consumers and schools Satisfaction with Loan Provider School Penetration (%) (1) 0% 20% 40% 60% 80% Discover Chase Wells Fargo Sallie Mae 82 90 90 86 90 92 98 88 Top 100 Colleges Top 50 Business Schools Top 50 Law Schools Top 50 Medical Schools 2010 2011 Source Millward Brown Survey, 2012 Note(s) 1. Placement of brands marketed by Discover at schools that use a lender list |
79 Student loans delivering attractive returns Net Interest Income Loss Provision Operating Expenses Pre-tax ROA 5% (1%) (1.5%) 2.5% Note(s) 1. Over life of loan Targeted Returns (1) Interest spreads in line with expectations Losses tracking with forecast Operating expenses moderately higher than target and anticipate future scale benefits Current Performance |
80 Student loans positioned to sustain profitability and growth 2012 Focus Strategic Priorities Customer Experience Product Expansion Portfolio Economics • Newly designed website and online application form • Migration to a single underwriting and servicing platform • Continued enhancement of underwriting capabilities • New collections platform and programs • Higher repeat business and cross-sell penetration • Targeted graduate and professional degree products • Introduction of differentiated loan types |
81 Discover Personal Loans |
82 Pursued thoughtful growth strategy to build portfolio $0.2 $1.0 $1.4 $1.9 2007 2008 2009 2010 2011 $2.6 Personal Loans Receivables ($Bn) |
83 Our value proposition provides best product option for consumers • Payments that don’t change over time and can be easily budgeted • Debt paydown within customer-defined timeframe • Streamlined application process • Consultative underwriting and superior servicing • Robust online account management • Convenience of automatic payment option • Rates 300 - 400bps lower than existing debt • Ability to lock rates in low interest environment • No origination fees or pre-payment penalties • Reputation as a responsible lender Value Service Simplicity |
84 Strong performance on key functional and emotional drivers leads to highly satisfied customers Likelihood to Recommend Personal Loan Provider Customer Experience Drivers • Easy to work with • Helps customers succeed • Offers good rates and terms • Trustworthy and ethical • Provides good customer service 0 10 20 30 40 50 60 70 80 90 Discover Wells Fargo PNC Chase Capital One Bank of America Source Millward Brown Survey, 2012 |
85 Net Interest Income Loss Provision Operating Expenses Pre-tax ROA Personal loans delivering attractive returns 9% (4%) (2%) 3% Higher interest margins given risk-based pricing strategy and lower funding costs Loss rate lower than target offset by reserve additions due to portfolio growth Expenses marginally higher due to marketing and infrastructure investments Targeted Returns (1) Current Performance Note(s) 1. Over life of loan |
86 Personal loans positioned to sustain profitability and growth Strategic Priorities 2012 Focus • Increase awareness of benefits of personal loans • Offer additional online self-service capabilities Customer Experience Product Expansion Portfolio Economics • Grow special purpose loan products • Offer top-up options to existing customers • Expand affinity and retail partnerships • Improve loan conversion rates through enhanced marketing • Launch next generation of credit risk methodologies |
87 Discover Home Loans |
88 Acquisition of Home Loan Center business provides a low cost, targeted expansion path into home loans • Transaction structured as asset purchase with no legacy portfolio exposure • $56 million acquisition cost • Experienced management team • Two call centers with ~300 licensed mortgage bankers • Proprietary direct-to-consumer technology platform scalable to accommodate future growth • Acquisition scheduled to close mid-year |
89 Business Model • Fee-based model, loan assets sold to investors with servicing released • 1st lien conforming, FHA and VA products with stable secondary market • Marketing efforts directed to Discover customers and online lead aggregation • Competitive rates and features Business model focused on direct mortgage originations Service Delivery Model • Streamlined processes differentiated for purchase and refinance • Dedicated mortgage banker assigned to each customer • Simple step-by-step application process • Comprehensive online self-service tools |
90 Well positioned across all businesses for future growth Our strategy • Expand direct-to-consumer model into other financial products • Accelerate profitable asset growth What we’ve accomplished • Top 5 in each product category • $27Bn in deposits, $11Bn in contractual receivables and +1 million customers (1) What lies ahead • Deliver ongoing value to our customers and shareholders • Continued growth and greater integration across products Note(s) 1. As of 2/29/12; contractual receivables are a non-GAAP measure, see appendix for reconciliation |
Delivering shareholder value through rigorous financial management Mark Graf EVP & Chief Financial Officer |
92 2011: Value creation through rigorous financial management • Greater than industry average loan growth drives above average revenue growth • Expense management supports growth while driving desired returns • Funding benefit from low rate environment helps offset card yield compression • Continued to diversify funding and maintain strong liquidity • Excess capital supports growth, share repurchase and dividend increases |
93 Strong quarterly financial performance ($ MM, except per share data) 1Q12 1Q11 Net Interest Income $1,293 $1,170 $123 11% Other Operating Revenue 550 563 (13) (2%) Total Revenue $1,843 $1,733 $110 6% Net Charge-offs $378 $689 ($311) (45%) Reserve Changes build/(release) (226) (271) 45 17% Provision for Loan Loss $152 $418 ($266) (64%) Total Operating Expenses $677 $595 $82 14% Total Expense 829 1,013 (184) (18%) Pretax Income $1,014 $720 $294 41% Net Income (Loss) $631 $465 $166 36% EPS $1.18 $0.84 $0.34 40% ROE 29% 28% 1% Total Average Receivables $57,606 $51,488 $6,118 12% Net Interest Margin 9.03% 9.22% -19bps YOY Change |
94 Expense management supports growth while driving desired returns Net Revenues (1) ($Bn) Operating Expenses ($Bn) Note(s) 1. Total company interest income plus total other income less interest expense. Excludes antitrust litigation settlement income from Visa and MasterCard and periods prior to 2010 are as adjusted for FAS 166/167, see reconciliation in appendix $2.4 $2.3 $2.2 $2.5 2008 2009 2010 2011 $6.4 $7.0 $6.7 $7.1 2008 2009 2010 2011 |
95 Funding cost tailwind helping to offset yield compression Note(s) 1. Interest expense divided by average receivables; annualized figure for 1Q12 2. Net interest income divided by average receivables; annualized figure for 1Q12 Net Interest Margin (NIM) (1) (2) -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2008 2009 2010 2011 1Q12 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 10.0% 10.5% Total Yield Cost of Funds NIM (Right Axis) |
96 $3.6 $3.4 $2.5 $2.2 $1.6 $2.5 $1.9 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Time deposits rolling off at higher rates Maturity Schedule through 2013 (1) ($Bn) Note(s) 1. Based on liabilities on the balance sheet as of 2/29/12; excludes expected new issuances and FDIC costs 2. Floating rate ABS is based on market rates on 2/29/12 $0.5 $2.8 $0.0 $2.1 $2.0 $1.1 $0.0 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 0.4% 1.7% NA 0.6% 0.8% 4.1% NA 2.7% 2.2% 2.1% 1.6 % 2.8% 3.9% 3.7% BCD DTC Avg. Rate Avg. Rate |
97 6.8 8.9 $27.7 12.1 2/29/12 ABS BCDs DTC (1) Other Diversified funding with strong liquidity 54% 28% 35% 21% 5% 46% 6% 4% Spin (6/30/07) 2/29/12 Funding Mix ($Bn) Liquidity Portfolio ABCP Open Lines Fed Discount Window Contingent Liquidity Sources ($Bn) $58.9 $49.7 Note(s) 1. Includes affinity deposits |
98 Strong capital position provides flexibility Source Comprehensive Capital Analysis and Review (CCAR) 2012; Federal Reserve estimates for CCAR banks and Discover Capital Plan from 2012 Capital Plan Review (CapPR) process Supervisory Stress Scenario Minimum Tier 1 Common Ratio (1,3) 9.7% 10.7% 13.0% 12.3% 11.8% 10.1% 9.9% 0% 5% 10% 15% CCAR Avg DFS AXP C JPM BAC COF 4.9% 5.4% 5.9% 7.8% 10.8% 11.6% 6.2% 0% 5% 10% 15% CCAR Avg DFS AXP COF BAC JPM C Tier 1 Common Ratio (1) Source SNL, 12/31/11 Regulatory Filings Minimum Minimum ROAE (2) 30% 28% 6% 11% 1% 11% 9% Note(s) 1. Tier 1 common capital (non-GAAP measure) as a percent of risk-weighted assets under Basel I; see appendix for reconciliation 2. Defined as return on average equity for FYE 2011 3. Calendar quarters for CCAR banks, fiscal quarters for Discover. Stress ratios with all proposed capital actions through 4Q13. The minimum capital ratio could occur in any quarter during the stress horizon 4Q11-4Q13 |
99 Capital position enables effective capital deployment • Received non-objection from Federal Reserve on planned capital distributions through March 2013 • Repurchased $425MM in shares during 2H11 and authorized new share repurchase program of $2Bn in 2012 • Revisit dividend at least annually • Generating returns above 15% ROE target with excess capital • Will deploy excess capital through – Organic growth – Dividend actions – Share repurchases – Disciplined acquisitions $2.2 $5.8 12/31/11 Illustrative Target Excess Capital Target Tier 1 Common Ratio (1) 9.5%+/- Target 13.0% Source SNL, 12/31/11 Regulatory Filings Note(s) 1. Tier 1 common capital (non-GAAP measure) as a percent of risk-weighted assets under Basel I; see appendix for reconciliation |
100 Discover shares outperformed but remain reasonably valued 2 Year Stock Price Performance Relative Valuation (4) Note(s) 1. Index includes BAC, C and JPM 2. Index includes AXP and COF 3. Index includes MA and V Source SNL, daily market data from 3/16/10 to 3/16/12 Source SNL, I/B/E/S, Capital IQ - market data as of 3/16/12 (1) (3) (2) Note(s) 4. U.S. BHCs with a market capitalization greater than $4.5Bn (excluding trust banks and thrifts) 5. Excludes share repurchases and dividend increases (5) (60) (40) (20) 0 20 40 60 80 100 120 3/16/10 8/5/10 12/27/10 5/18/11 10/7/11 3/1/12 DFS Bank Issuers Credit Card Card Networks CIT CMA BAC JPM C WFC FITB HBAN PNC STI COF BBT PBCT MTB USB AXP DFS KEY RF 0.0 x 0.5x 1.0x 1.5x 2.0x 2.5x 3.0x 3.5x 4.0x 4.5x 5.0x 2% 8% 14% 20% 26% 32% 2012E ROATCE Y = 0.13X - 0.07 R 2 = 0.86 |
2012 Financial Community Briefing David Nelms Chairman & Chief Executive Officer |
102 Profitable long-term growth model Updated Business Model Asset / Volume Growth EPS Growth / Contribution Card 2 - 4% 3 - 4% Other Consumer Lending 10-15% 3 - 4% Payments 10%+ 2%+/- Organic Asset Growth 5 - 6% 8 - 10% Capital Management / Acquisitions 0 - 4% 2 - 5% Total Growth 5 - 10% 10 - 15% Targets: Tier 1 Common Ratio (1) ~9.5% ROE 15% + Note(s) 1. Tier 1 common capital (non-GAAP measure) as a percent of risk-weighted assets under Basel I; see appendix for reconciliation |
103 • Increasing acceptance globally and exploiting opportunities in payments • Growing receivables, sales and profits in card • Diversifying our lending portfolio • Deploying excess capital to drive shareholder value Our Direct Banking and Payments strategy is delivering profitable growth |
2012 Financial Community Briefing March 22, 2012 |
105 Appendix |
106 Reconciliation of GAAP to Non-GAAP data ($MM) 2009 Net Revenue Reconciliation Net Interest Income $1,894 $2,919 $4,813 $17 $4,830 Other Income 2,949 (923) 2,026 160 2,186 Net Revenue Reconciliation $4,843 $1,996 $6,839 $177 $7,016 2008 Net Revenue Reconciliation Net Interest Income $1,405 $2,784 $4,189 ($9) $4,180 Other Income 3,401 (1,311) 2,089 104 2,194 Net Revenue Reconciliation $4,805 $1,473 $6,278 $95 $6,374 2007 Net Revenue Reconciliation Net Interest Income $1,361 $2,276 $3,638 $0 $3,638 Other Income 3,377 (1,157) 2,220 - 2,220 Net Revenue Reconciliation $4,738 $1,120 $5,857 $0 $5,857 Non-GAAP As Adjusted As Reported Securitization Adjustments Managed Additional Adjustments Note(s) 1. As adjusted basis (non-GAAP) data is presented to show how the Company's financial data would be presented if the trusts used in the Company’s securitization activities were consolidated into the Company’s financial statements. As adjusted data also excludes the impact of income received in connection with the settlement of the Company's antitrust litigation with Visa and MasterCard in 2008 and 2009. Management believes the non-GAAP as adjusted data is useful to investors as it aligns with the financial information used in management's decision making process and in evaluating the business and reflects all periods on a consistent basis. |
107 Note(s) 1. Tier 1 common equity, a non-GAAP financial measure, represents common equity and the effect of certain items in accumulated other comprehensive income (loss) excluded from tier 1 common equity, less goodwill and intangibles. Other financial services companies may also use tier 1 common equity and definitions may vary, so we advise users of this information to exercise caution in comparing tier 1 common equity of different companies. Tier 1 common equity is included to support the tier 1 common capital ratio which is meaningful to investors to assess the quality and composition of the Company’s capital. Additionally, proposed international banking capital standards (Basel III) include measures that rely on the tier 1 common capital ratio. 2. Tier 1 Common Capital Ratio represents tier 1 common equity, a non-GAAP measure, divided by risk-weighted assets. Reconciliation of GAAP to Non-GAAP data (cont’d) ( $MM) 12/31/2011 2/29/2012 Tier 1 Common Equity Reconciliation Total Shareholders' Equity $8,358 $8,829 Effect of certain items in Accumulated Other Comprehensive Income (Loss) excluded from Tier 1 Common Equity 50 49 Less: Ineligible Goodwill and Intangible Assets (443) (442) Total Tier 1 Common Equity (1) $7,965 $8,436 Risk Weighted Assets $61,115 $59,073 Tier 1 Common Ratio (2) 13.0% 14.3% |
108 Reconciliation of GAAP to Non-GAAP data (cont’d) (unaudited, $ in billions) 11/30/11 2/29/12 GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (ending loans) $5.3 $5.1 Adjustment for Purchase Accounting Discount 0.4 0.4 Contractual Value Purchased (Private) Credit Impaired Student Loans (ending loans) (1) $5.7 $5.5 GAAP Private Student Loans (ending loans) 2.1 2.2 GAAP Personal Loans (ending loans) 2.6 2.8 Contractual Value Private Student Loans & Personal Loans (ending loans) (1) $10.4 $10.5 (unaudited, $ in billions) Twelve Months Ended 12/31/11 GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (average loans) $3.5 Adjustment for Purchase Accounting Discount 0.5 Contractual Value Purchased (Private) Credit Impaired Student Loans (average loans) (1) $4.1 GAAP Private Student Loans (average loans) 1.7 Contractual Value Private Student Loans (average loans) (1) $5.8 (unaudited, $ in millions) Twelve Months Ended 12/31/11 GAAP Private Student Loan Net Principal Charge-offs $8.1 Adjustment for Purchased (Private) Credit Impaired Student Loans Net Principal Charge-offs 47.5 Contractual Private Student Loan Net Principal Charge-offs (2) $55.6 Note(s) 1. The contractual value of the purchased private student loan portfolio is a non-GAAP measure and represents purchased private student loans excluding the purchase accounting discount. The contractual value of the private student loan portfolio is meaningful to investors to understand total outstanding student loan balances without the purchase accounting discount. 2. Contractual private student loan net principal charge-offs is a non-GAAP measure and include net charge-offs on purchase credit impaired loans. Under GAAP any losses on such loans are charged against the nonaccretable difference established in purchased credit impaired accounting and are not reported as charge-offs. Contractual net principal charge-offs is meaningful to investors to see total portfolio losses. |