March 12, 2013 2013 Financial Community Briefing ©2013 DISCOVER FINANCIAL SERVICES 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. Company financial data presented herein is based on a calendar year. As previously reported, the Company changed its fiscal year end from November 30 to December 31 of each year, effective beginning with the 2013 fiscal year. For more information, see the Company's Current Report on Form 8-K dated March 5, 2013, which includes the Company's financial results on a calendar-year basis for each quarter in 2012 and 2011, as well as the twelve months ended December 31, 2012, 2011 and 2010. 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, 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, 2012, which is on file with the SEC. 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 Cashback Checking , Discover it , 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. SM TM |
3 Agenda Discover’s strategy David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER Achievements and strategic priorities Roger Hochschild PRESIDENT & CHIEF OPERATING OFFICER Leveraging risk management capabilities Jim Panzarino EVP & CHIEF CREDIT RISK OFFICER Driving strong returns and taking share Harit Talwar EVP, PRESIDENT - U.S. CARDS Expanding direct banking products Carlos Minetti EVP, PRESIDENT - CONSUMER BANKING & OPERATIONS Realizing network potential Diane Offereins EVP, PRESIDENT - PAYMENT SERVICES Financial performance and effective capital deployment Mark Graf EVP & CHIEF FINANCIAL OFFICER Closing remarks and Q&A David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER |
2013 Financial Community Briefing David Nelms Chairman & Chief Executive Officer |
5 Positioned for success as the leading direct bank and payments partner • Driving superior returns • Gaining card market share through a new flagship product, cash rewards and customer experience • Leveraging risk management capabilities across asset classes • Growing student and personal loans while introducing new direct banking products • Partnering in payments to drive volume and profits • Creating shareholder value through effective capital management |
6 Discover’s Strategic Objective: Be the leading direct bank and payments partner Brand Customer Service Risk Management Unique Assets and Capabilities Rewards Flexible Payment Networks Loyal Customer Base |
7 Preferred Banking Channel Source American Bankers Association Survey 2012 2 Yr Avg. Efficiency Ratio (1) Source SNL, Regulatory Reports 1/1/11 – 12/31/12 Efficient and effective strategy Branch Preference Large Bank Avg. (2) Note(s) 1. Non-interest expense divided by total revenue (net interest income and noninterest income) 2. Bank holding companies participating in the 2013 Comprehensive Capital Analysis and Review (CCAR) and Capital Plan Review (CapPR), excludes Discover 2008: 34% 2012: 18% Internet 39% Phone / Mobile 15% Mail 8% ATM 12% Branch 18% NA 8% 87% 73% 70% 66% 55% 38% BofA Amex Citi JPMorgan CapOne Discover |
8 Flexible payments partner Merchants Acquirers Issuers Mobile Wallets Networks |
9 2 Yr. Avg. ROE Source SNL, regulatory reports 1/1/11 - 12/31/12 Model drives superior performance in banking industry Note(s) 1. Bank holding companies participating in the 2013 Comprehensive Capital Analysis and Review (CCAR) and Capital Plan Review (CapPR), excludes Discover (1) Discover Model • Leverage card-built position and capabilities in direct marketing, risk management and service • Exploit higher growth and higher return direct business mix • Alternative payments strategy and flexibility provide opportunities Target 15%+ 28% 7% DFS Large Banks |
2013 Financial Community Briefing Roger Hochschild President & Chief Operating Officer |
11 Delivered outstanding performance in calendar year 2012 • Delivered record profits – $2.4 billion net income with strong ROE of 26% • Drove record network sales volume – $307 billion volume with growth of 9% YOY • Delivered industry leading card loan growth – 5% growth YOY in ending receivables • Achieved all-time low total net charge-off rate of 2.24% – 149bps decrease in net charge-off rate YOY • Continued success in student lending – Approximately $1 billion in originations • Launched the Discover Home Loans product – Originated more than $2 billion in mortgages in first six months • Focused on capital, liquidity and funding – Returned $1.4 billion to shareholders |
12 2.1% 2.6% 3.5% 3.9% 4.4% 4.9% AXP DFS COF JPM C BAC DFS 5% AXP 4% COF 0% JPM -3% C -6% BAC -7% Outperforming peers in card loan growth and credit Note(s) 2012 Net Charge-Off Rate (1) 2012 Loan Growth (YOY) (1,2) Source Public company data, calendar year 1. Reflects card receivables growth and net charge-off rate for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card ), Citi (Citi-branded Cards N.A.) and JPMorgan Chase (Card Services excluding Commercial Card) 2. Capital One 2012 loan growth excludes HSBC acquisition and is based on management commentary |
13 • Grow Discover card loans share while maintaining leading credit performance • Expand direct consumer banking • Grow global network volume and acceptance • Optimize funding, cost structure and capital position • Enhance operating model 2013 Priorities |
14 • Launch new flagship product in card - Discover it • Expand mortgage platform with home equity • Enhance operations and implement new core banking platform • Implement PayPal, and other non-traditional partners • Expand PULSE network to all debit transactions • Diversify funding sources through direct checking 2013 Strategic Initiatives |
2013 Financial Community Briefing Jim Panzarino EVP, Chief Credit Risk Officer |
16 Delivering strong credit performance across products • Continued investments in data, analytics and operations • Disciplined growth through innovative credit assessment and management • Leveraging card risk management capabilities to support growth in other lending products |
17 Underwriting Portfolio Management Data and Analytics Organizational structure enables consistent performance • Data and analytics deepen customer insights • Operational integration embeds risk intelligence in customer engagements • Structure allows for faster execution ensuring industry leading performance Risk Management Strategy New Accounts Cardmember Assistance Authorization Operations |
18 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 • Stronger customer influence through in-house collection activities Card Net Charge-off Rate Source Public company data, calendar year Note(s) 1. Includes American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card ), Citi (Citi-branded Cards N.A.) and JPMorgan Chase (Card Services excluding Commercial Card) (1) 0% 2% 4% 6% 8% 10% 12% Discover Peer Group 4Q08 4Q09 4Q10 4Q11 4Q12 |
19 $1.8 $0.9 2010 2012 $46.8 $51.1 2010 2012 49% Growing card receivables while managing risk Receivables ($Bn) 30+ Delinquencies ($Bn) Source Discover, calendar year end data 9% |
20 76% 83% 2010 2012 Continued improvement in cards risk profile Receivables (FICO > 660) Source Discover, calendar year end data weighted by balance Loans with Tenure > 5 Yrs (1) Note(s) 1. Based on loan balances from accounts opened more than five years ago 71% 75% 2010 2012 |
Student loan industry Source Federal Loans Total Balances ($Tn) Federal Loans 90+ Delinquency Rate Student loan growth driven by Federal loans, which show a 27% increase in delinquencies 21 “An Evaluation of Dynamics in The Student Loan Market”, 2013 TransUnion report |
22 2.8% 1.1% Sallie Mae Discover Discover Student Loans: Industry leading underwriting approach Underwriting approach 2012 Net Charge-off Rates Source Public company data, calendar year Note(s) 1. Defined as net losses to average receivables for the private education loan portfolio 2. Defined as net losses to average managed contractual receivables which is a non- GAAP measure for DFS; see appendix for reconciliation • High cosigner rate • High origination FICO • Focus on 4 year and graduate not- for-profit schools • School certification for all borrowers and direct disbursement of funds to schools (1) (2) |
23 1.0% 0.5% 2010 2012 $1.9 $3.3 2010 2012 Discover Personal Loans: Growing receivables while managing risk Receivables ($Bn) 60+ Delinquency Rate 72% 52% Source Discover, calendar year end data |
24 Today we shared… Our credit performance across all products continues to be better than the peer group We maintain a high credit quality portfolio across all product types We increased our receivables by $9 billion across products in two years Our organizational structure and investments in data and analytics should continue to produce industry leading performance Sustained Performance Investment in Capabilities Portfolio Growth Portfolio Quality |
25 0% 1% 2% 3% 4% 5% 6% Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Where is credit headed? Source Discover, monthly data Card 30+ Delinquency Rate |
2013 Financial Community Briefing Harit Talwar EVP, President - U. S. Card |
27 Robust growth, attractive returns and strengthening competitive advantage • Strong momentum in card business in 2012: – 5.2% YOY growth in loans and 81bps increase in market share (1) – 10% YOY increase in new accounts – 150bps YOY increase in wallet share with existing customers (2) • Strategic focus on leveraging our competitive advantages through: – Launch of new flagship product - Discover it – Enhancing rewards leadership including leveraging proprietary network – Superior customer experience across online, mobile, and phone interactions Note(s) 1. Includes weighted average card loans growth for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excluding installment loans & HSBC), Citi (Citi-branded Cards N.A.), and JPMorgan Chase (Card Services) 2. Internal and bureau data as of December 2012 |
28 81bps 78bps 29bps -25bps -54bps -110bps DFS AXP COF JPM C BAC Gaining market share in card loans 2012 Card Loan Market Share Growth (YOY) (1) Note(s) Source Public company data, calendar year Market share change based upon total loans for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excluding installment loans & HSBC), Citi (Citi-branded Cards N.A.), and JPMorgan Chase (Card Services) 1. |
29 Note(s) 1. Credit card ending loans mix by APR (%); pre-CARD Act is an average of 2006-2008 inclusive Prudent management of loan mix 23% 16% 18% 52% 67% 67% 25% 17% 15% Pre-CARD Act CY2011 CY2012 Promotional Standard Cash and Other Card Loan Mix (%) (1) |
30 More profitable than peer group Note(s) 1. Pre-tax income adjusted for loan loss reserve changes divided by average card receivables, which is a non-GAAP measure; see appendix for Discover GAAP reconciliation 2. Includes American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excluding estimated HSBC one-time adjustments), Citi (Citi-branded Cards N.A. based on segment tax rate), and JPMorgan Chase (Card Services) 5.9% 5.6% 4.8% 4.0% 3.2% 2.4% DFS AXP COF BAC JPM C Source Public company data, calendar year 2012 Pre-Tax Card ROA (1,2) (excl. change in loan loss reserves) |
31 • New flagship product • National rollout in response to strong pilot performance • Transforms traditional card industry model Discover it – accelerating customer acquisition |
32 Distinctive combination of product features Note(s) – comparison chart, visit – 5% cash back caps at $1,500 Comparison based on information obtained on issuers' websites or from customer service representatives as of November 2012. For full version of www.discover.com |
33 Unique design and customer experience • New online application process • Distinctive card design and communications • Expedited delivery • Access to live account manager • Superior service experience Surprise and delight Card delivery Card design |
34 Emphasizing value proposition beyond price Note(s) – Creatives highlight key features only for illustrative purposes |
35 Integrated go-to-market strategy |
36 Wallet Share of Loans (1) • Increase in wallet share with existing customers significant driver of loan growth • Competitive advantage in rewards and customer experience driving this growth Increasing wallet share with existing customers Note(s) 1. Wallet Share is the amount of customer loans with Discover vs. other cards in wallet as of December of each year; share based upon credit bureau data and internal modeling 2010 2011 2012 300bps+ |
37 45% 25% 21% 15% 12% 10% DFS JPM AXP BAC COF C • Cash rewards on all purchases with no caps, plus special earn and redeem choices • Robust platform for partner programs • Superior customer experience • Continuous innovation The largest cash rewards program Cash Rewards Household Penetration Source TNS 2012 Consumer Card Strategies Research Program |
• Successfully evolved Cashback Bonus as a currency at point-of- purchase • Double digit increase in Discover Card registrations and sales at Amazon • Multiple programs including exclusive card partner for Kindle Fire launch New program with Amazon resonating strongly with customers 38 |
Leveraging emerging technologies and partnerships Discover rewards in popular wallets (e.g., Apple Passbook) Multiple offers in Discover Extras Discover shopping mall on mobile 200+ partners Redeeming rewards at POS 50+ partners Note(s) Registered trademarks are the property of respective owners |
40 • Leverage 300%+ increase in mobile adoption (1) • Continuous transformation of customer experience • Enhanced eCommerce platforms to increase customer acquisition and card usage Online / mobile critical to growth Empowering Customers Note(s) 1. December 2010 to December 2012 internal data, unique cardmembers logging in to mobile site |
41 842 837 800 786 775 772 AXP DFS JPM COF C BAC • Approximately 20% increase in customer interactions • Approximately 50% reduction in cost per customer interaction (1) • 80% of customer contacts are online Empowering customers and reducing costs Note(s) 1. Interactions / contacts with Discover cardmembers as measured year-over-year; cost per customer interaction as measured from 2007 to 2012 2. The Customer Interaction Index is a composite of five weighted factors, including: Website Interaction, Customer Service Representative Interaction, Assisted Online Interaction, Automated Phone System Interaction, and Mobile Phone Interaction JD Power Customer Interaction Index (2) Source J.D. Power and Associates 2013 Credit Card Satisfaction Study SM |
• 67% of new accounts online • Accounts active online contribute 80%+ of sales / loans eCommerce platforms driving card acquisition and usage Note(s) New accounts represent online activated accounts 42 |
43 Robust growth, attractive returns and strengthening competitive advantage • Strong momentum in card business in 2012: – 5.2% YOY growth in loans and 81bps increase in market share (1) – 10% YOY increase in new accounts – 150bps YOY increase in wallet share with existing customers (2) • Strategic focus on leveraging our competitive advantages through: – Launch of new flagship product - Discover it – Enhancing rewards leadership including leveraging proprietary network – Superior customer experience across online, mobile, and phone interactions • Annual loan growth target of 2-5% • Large, loyal customer base creating further growth opportunities Note(s) 1. Includes weighted average card loans growth for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card excluding installment loans & HSBC), Citi (Citi-branded Cards N.A.), and JPMorgan Chase (Card Services) 2. Internal and bureau data as of December 2012 |
2013 Financial Community Briefing Carlos Minetti EVP, President – Consumer Banking & Operations |
45 Expansion to a diversified direct bank model driven by long-term strategic objectives • Develop additional sources of sustainable growth • Provide asset class and earnings diversification • Grow core funding source and lower overall cost of funds • Pursue opportunities that align with “direct-to-consumer” distribution model • Leverage proven Discover strengths / competitive advantage |
46 Leveraging strengths and capitalizing on changing market conditions to launch new businesses • Financial crisis created market disruption and forced many firms to pull back • Changing consumer attitudes towards debt • Evolving regulatory climate • Growing acceptance of online banking • Emergence of mobile technology • Discover brand • Loyal customer base • Customer service and online experience • Risk management and analytics • Product development and direct marketing Marketplace Strengths |
L M H Consumer Banking Landscape Pursued disciplined execution around categories with sizeable opportunity and best fit to direct model Credit Card Point of Sale Installment Private Label Credit Card Specialty Loans Auto Lending 1 Mortgage (Indirect) Source Moody’s, SNL, TransUnion, Discover analysis Personal Loans Student Loans Certificates of Deposit 1 Mortgage (Direct) Savings Home Equity (1) Checking Note(s) 1. Home equity product launch to be determined 47 Strategic Fit st st |
48 Made remarkable progress and new businesses increasingly contributing to the bottom line • $12Bn in receivables (1) • 18% of receivables • 10% of Direct Banking NI • $28Bn of direct deposits • 47% of funding • 600K customers Note(s) 1. Includes contractual student loan receivables, a non-GAAP measure; see appendix for reconciliation |
49 Discover Student Loans |
50 $0.4 $0.6 $1.0 $2.1 $3.1 $3.7 $5.7 $5.0 2008 2009 2010 2011 2012 Organic Purchased Portfolios $4.7 $7.8 $8.1 Generated substantial organic loan growth and integrated acquired portfolios Note(s) 1. Contractual receivables is a non-GAAP measure; amounts represent year-end balances, see appendix for reconciliation 2. Includes CitiAssist originated loans for 2011 and 2012 Student Loan Receivables ($Bn) (1) 2012 Accomplishments (2) Launched health professions, law and MBA loans Implemented fixed rate loan Expanded placement on schools’ lists Migrated acquired customers to the Discover brand Increased operational scale and in- sourced servicing for 400K CitiAssist accounts Launched new collections platform Implemented new risk model and enhanced underwriting process Expanded product breadth and market presence Enhanced operating efficiency |
51 Increase volume of Discover-branded originations and manage losses as more loans enter repayment Accelerate Discover-branded growth • Expand product offerings, including Bar, Residency and Consolidation loans • Implement enhanced marketing strategy • Capture increased share of repeat borrowing Maintain strong portfolio economics • Optimize marketing channel mix to reduce acquisition costs • Increase pre-repayment education for borrowers and cosigners • Offer more repayment options to assist customers • Enhance self-service functionality 2013 Priorities |
52 Discover Personal Loans |
53 Delivered robust receivables growth from high quality consumers $1.1 $1.4 $1.9 $2.7 $3.3 2008 2009 2010 2011 2012 Improved customer acquisition • Introduced new risk models for broad • Developed new direct mail targeting • Improved application conversion rates Enhanced customer contact strategy • Launched public website • Streamlined online application process • Introduced electronic delivery of Source Discover, calendar year Personal Loan Receivables ($Bn) 2012 Accomplishments market models documents |
54 Ongoing refinement of business model to sustain growth trends and profitability Improve targeting of prospects • Expand qualified universe • Enhance underwriter training and tools • Deploy next generation of risk models Enhance effectiveness of communications • Customize marketing messaging • Expand usage of phone and e-mail Increase customer lifetime value • Launch strategy for customers with • Introduce multi-dimensional pricing • Cross-sell other Discover products 2013 Priorities channels recurring needs |
55 Discover Home Loans |
56 Successfully completed acquisition and established strong market presence Executed seamless transition • Operating in 48 states and DC • Integrated risk management Built marketing capabilities • Multi-channel brand awareness • Online and direct marketing infrastructure Developed customer-centric experience • Dedicated mortgage banker • Simple application process with online • Service guarantee and reward programs Source Discover, calendar year Funded Loan Volume ($MM) 2012 Accomplishments DFS Branded Lead Aggregator $309 $614 $762 $642 3Q12 4Q12 $1,071 $1,256 campaigns status tracking |
57 Enhance operating model to capture additional customers and achieve cost efficiencies Broaden market presence • Launch VA & Jumbo products • Enhance distribution capability to target • Establish partnerships to source leads Expand marketing capabilities • Improve customer targeting and • Enhance online tools and content • Implement broad market strategy Drive operational efficiencies • Gain funding and operational efficiencies • Make strategic infrastructure investments • Improve secondary market execution 2013 Priorities purchase market conversion |
58 Discover Home Equity Loans |
59 $126 $61 $53 $54 $61 2008 2009 2010 2011 2012E HE Installment Loan HE Line of Credit Housing market recovery provides Home Equity opportunity Large market experiencing recovery • Early signs of recovery observed in 2012 • Equity in homes being replenished as home values increase Credit risk is manageable • Initial underwriting grounded on unsecured lending expertise • Loss rates on new originations have returned to pre-crisis levels of 1% Discover customers targeted for initial launch • Approximately 80% of Discover customers are home owners • Sizeable percentage could benefit from home equity offering Source Moody’s Economy.com Home Equity Industry Originations ($Bn) Opportunities |
60 Personal Loans Strengths Home Loans Strengths Home Equity leverages the strengths of both Home Loans and Personal Loans • Prospect targeting and direct marketing • Credit modeling and analytics • Judgmental underwriting • Real estate loan sales • Loan processing and documentation • Online customer experience • Secured, closed-end, fixed-rate product • Consolidate loans to lower interest rates and pay down debt • Loan balances between $25K and $100K • Direct marketing supported by online presence Home Equity Positioning |
61 Direct-to-Consumer Deposits |
62 Note(s) Strengthened economic attributes of the portfolio and broadened value proposition Improved portfolio economics • De-emphasized rate positioning • Focused acquisitions on cross-sell and • Improved CD renewal and portfolio Enhanced customer experience • Upgraded mobile and tablet capabilities • Launched mobile bill payment and • Added “click to chat” to 24X7 customer Direct-to-Consumer Deposits ($Bn) 2012 Accomplishments Source Discover, calendar year $7 $13 $21 $27 $28 2008 2009 2010 2011 2012 affinity retention rates service remote deposit capture (1) 1. AAA Affinity deposits are included as consumer deposits, but are classified as brokered deposits in FDIC call reports |
63 • Achieves cost of funds benefit in a rising rate environment • Deepens customer relationships given transactional nature of product • Delivers richer product features and better value given lower direct banking cost structure • Leverages Discover and PULSE networks Establish core banking presence and lower cost of funds with launch of checking product Strategic Rationale |
64 • Almost 50% of consumers who switch banks do so because of new or higher fees (1) • Majority of households maintain more than one checking account (2) • More than 60% of those aged 18-34 prefer to bank via the internet or via mobile phone (1) • Cash rewards program seen as compelling for Discover customers (3) Note(s) 1. Mintel Retail Banking Report, Oct 2012. Internet users aged 18+ who have a bank account and switched banks in the last three years 2. Discover transaction account online survey (Feb 2011) 3. Discover sponsored research 4. Consumer must have Discover credit card to earn Cashback Bonus Discover Cashback Checking fulfills unmet consumer needs No monthly service fees No minimum balance Earn Cashback Bonus on Debit Card Online Bill Pay Checks Customer Insights Value Proposition everyday transactions: (4) |
65 Lower cost structure enables Discover to offer feature-rich Cashback Checking Note(s) Chase Bank of America Wells Fargo Total Checking eBanking Value Checking No Monthly Fee (No Balance/Activity Requirements) Access to Over 60,000 No Fee ATMs Rewards on Purchases, Checks and Online Bill Pay transactions Free Online Bill Pay Free Money Transfers (Inbound / Outbound) Free Check Reorders Free Official Bank Check Free Replacement Debit Card Expedited Delivery for your Replacement Debit Card Branches Banks may waive fees if other conditions are met Competitors’ fees and features are quoted for accounts opened in Illinois as of 2/18/13. Fees obtained from company account agreements, fee schedules, online chat and calls to customer service centers. Access to over 60,000 ATMs for Discover Cashback Checking customers based on planned network coverage Cashback Checking |
66 Smart phone imaging capability enables remote check deposits Enter Deposit Amount Capture Image Confirm and Authorize |
67 No-fee access to cash through extensive ATM network |
68 Direct Cashback Checking will add a significant new product into our overall direct banking offering |
69 Continue to execute against strategic roadmap to deliver superior shareholder value |
2013 Financial Community Briefing Diane Offereins EVP, President – Payment Services |
71 Achieving our vision through investments in acceptance and network capabilities • Strategic payment network alternative for emerging partners and technologies • Broadening payment network capabilities • Driving volume with issuer partners • Continuing to expand domestic and international merchant acceptance |
72 Payments – delivering on our strategy 2007 2012 • $186Bn volume • $37MM PBT • 265,000+ ATMs • 7MM+ acceptance locations • Settled in 1 currency • Operated in 34 countries/territories • $307Bn volume • $178MM PBT • 900,000+ ATMs • 21MM+ acceptance locations • Settle in 27 currencies • Operates in 185 countries/territories Owned Network Alliances Note(s) Fiscal year ending figures for 2007 and calendar year data for 2012 |
73 95 91 96 104 109 6 6 7 8 9 107 109 121 141 161 15 26 27 29 28 $223 $232 $251 $282 $307 2008 2009 2010 2011 2012 $191 $244 $271 $303 $344 $87 $109 $143 $171 $178 2008 2009 2010 2011 2012 Revenue Profit Before Tax Strong increase in volume and revenue Volume Growth ($Bn) 2008 – 2012 CAGR: 16% Revenue 20% PBT 2008 – 2012 CAGR: 8% Network Partners Proprietary Source Discover, calendar year Payment Services Revenue & Profit Before Tax ($MM) |
74 2008 2009 2010 2011 2012 Active Merchant Outlets (1) U.S. acceptance drives revenue growth Areas of focus • High Impact Merchant Program • Direct Mail and Site Visits • Promotional Pricing 2008 – 2012 CAGR: 6% 2012 High Impact Merchant Marketing Wins Note(s) 1. Merchants active in last 30 days – Over 50K outlets activated, $1.5Bn in volume since 2009 – Over 1MM contacts in 2012 through direct mail and in-person visits – 2013 initiative further driving small merchant engagement |
75 $107 $109 $121 $141 $161 2008 2009 2010 2011 2012 PULSE Volume ($Bn) PULSE: Strong performance in a highly competitive environment Debit Industry Mix Source 2012 Debit Issuer Study, commissioned by PULSE PIN Signature Source Discover, calendar year 67% 33% |
76 Cadence Bank Expanding network to all debit transactions Other Responses • Launch support of PINless POS transactions under $50 in 2Q13 • Pilot routing option to open signature debit transactions to PULSE in 3Q13 • Optimize product and pricing strategies to diversify revenue and support technology innovations • Discover signature debit agreement with Cadence Bank • Growing pipeline of Discover debit opportunities |
77 Investing in Diners franchise partnerships New partnerships with the largest credit issuers in: • Diners Club International issuing program launched in September 2012 • Diners Club International issuing program launched in July 2012 • On track to become the second franchise issuer of Discover Card in 2013 India Russia China • Diners Club International issuing program will launch in 2013 |
78 Strong global acceptance growth in 2012 Note(s) – The map denotes countries or territories with transactional activity in the last year (bright orange) – Outlet growth percentages based on year-over-year internal reporting – Merchant locations based on Retail Banking Research Asia Pacific 3% North America 6% EMEA 22% Latin America 23% • Over 21MM merchant locations globally • Over 900,000 ATMs in 116 countries • Over 1.2MM net new outlets outside the U.S. |
79 Network alliance update |
80 Investing in network capabilities EMV / Chip Mobile / Emerging • Real-time “receipts”, alerts, and offers delivered seamlessly from moment of payment to cardmember device • Advanced authentication and security for mCommerce and eCommerce payments • Linkage from mobile devices to cloud-based mobile wallets • Rules and guidelines for mobile wallet providers to allow network-to- issuer data flow • Deploying Discover D-PAS domestically & internationally across our networks • Discover uniquely licenses its D-PAS specification to networks lacking an EMV specification of their own |
81 Leveraging infrastructure for unique emerging payments solutions Leverage data from robust merchant registration Offer delivery and enhanced customer servicing Custom virtual networks Expand billing and settlement beyond traditional purchase transaction Any-to-any value exchange Fee and revenue share collection |
82 PayPal partnering with Discover to reach the physical POS What is the opportunity? What does PayPal bring? • PayPal has 50MM+ active domestic account holders • PayPal’s net Total Payment Volume for 2012, the total value of transactions, was $145Bn • Transactions are governed by PayPal operating regulations and program rules What does Discover bring? • Discover serves as a 3 Party service provider to PayPal • Contacted qualified merchants in the DFS retained portfolio • DFS acquiring partners have been contacted to secure acceptance of PayPal at their merchants • Program on-track to launch Spring 2013 • Leverages Discover’s 9MM+ domestic merchant footprint • Acquirer pricing set by PayPal • Acceptance of PayPal is seamless to participating merchants rd |
83 Unique network assets deliver another collaboration • Facebook launched the Facebook Gift card program on January 31, 2013 • The Facebook Card will serve as a single access device to multiple merchant gift monies, stored in separate “purse” accounts • Program provides consumer choice |
2013 Financial Community Briefing Mark Graf EVP & Chief Financial Officer |
85 Financial drivers – the year ahead • Targeting greater than industry average card loan growth • Investing in growth opportunities while maintaining core expense discipline • Funding benefit from low rate environment continues to help offset card yield compression • Continuing to diversify funding and maintaining robust liquidity • Capital supports growth, dividend actions and share repurchase |
86 Key long-term targets Note(s) 1. Tier 1 common capital (non-GAAP measure) as a percent of risk-weighted assets under Basel I; see appendix for reconciliation Growth Rate Card Receivables 2 - 5% Other Consumer Lending 5 - 10% Payments Volume 10%+ Tier 1 Common Ratio (1) ~9.5% ROE 15%+ |
87 Strong calendar year 2012 financial performance • Net interest income increased due to loan growth and margin expansion • Less benefit from reserve releases offset by lower charge-offs • Operating expense increased due to legal expenses, launch of home loans and other ($MM, except per share data)CY2011CY2012B /$4,900$5,4212,2032,269 Net Interest Income$4,900$5,4212,2032,269 Other Operating Revenue2,2032,269 ($MM, except per share data) CY2011 CY2012 $ % Net Interest Income $4,900 $5,421 $521 11% Other Operating Revenue 2,203 2,269 66 3% Total Revenue $7,103 $7,690 $587 8% Net Charge-offs $2,012 $1,309 $703 35% Reserve Changes build/(release) (1,033) (457) (576) (56%) Provision for Loan Loss $979 $852 $127 13% Operating Expenses $2,562 $3,074 ($512) (20%) Pretax Income $3,562 $3,764 $202 6% Net Income (Loss) $2,260 $2,351 $91 4% Diluted EPS $4.13 $4.50 $0.37 9% ROE 30% 26% -400 bps B / (W) |
88 Average Average ($MM) Balance Rate Balance Rate Loan receivables $53,971 11.69% $58,336 11.38% Other interest-earning assets 10,772 0.68% 12,523 0.77% Total interest-earning assets $64,743 9.86% $70,859 9.50% Interest bearing deposits $36,563 2.67% $41,308 2.01% Borrowings 18,625 2.70% 19,145 2.52% Total interest-bearing liabilities $55,188 2.68% $60,453 2.21% NIM on receivables 9.08% 9.29% NIM on interest-earning assets 7.57% 7.65% CY2012 CY2011 Net interest margin remains above business model target • Lower funding costs more than offset yield compression • Net Interest Margin Outlook: – Expected to remain above normalized range of 8.5-9.0% for 2013 |
89 $3.7 $2.0 $1.3 2010 2011 2012 Net Principal Charge-Off Reserve Release Expect near-term stabilization in credit Note(s) 1. Periods prior to 2010 are as adjusted for FAS 166/167 Credit Card 30+ Delinquency Rates (%) 4Q12 Provision for Loan Losses ($Bn) Source Discover, calendar year 0% 1% 2% 3% 4% 5% 6% 1Q08 4Q09 3Q11 (1) |
90 $2.6 $3.1 $3.1 2011 2012 2013E Expenses driven by a purposeful increase in investments for future growth Total Expense ($Bn) 2013 Expense Growth Categories Note(s) • Full-year impact of home loans and launch of home equity • Additional card marketing • Technology investments • Network partnerships Efficiency Ratio (2) 36% 40% -- $2.9 (1) Targeting normalized efficiency ratio of 38%+/- for the total company Adjusted for $216 million of legal expenses incurred in 2012 and associated primarily with the CFPB and FDIC consent order Defined as reported noninterest expense divided by total revenue (net interest income and noninterest income) 1. 2. |
91 $0.8 $2.0 $0.3 $0.0 $2.3 $1.0 $1.0 $0.0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 $2.8 $3.6 $4.1 $2.8 $1.2 $1.9 $1.8 $1.3 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 High rate time deposits continue to roll off Maturity Schedule through 2014 ($Bn) (1) Note(s) 1. Based on liabilities on the balance sheet as of 12/31/12; excludes expected new issuances and FDIC costs 2. Floating rate ABS is based on market rate estimates as of 2/28/13 1.6% 2.1% 3.6% 2.2% 1.8 % 2.3% 2.3% 3.0% Brokered Direct Avg. Rate (2) Avg. Rate 0.7% 2.6% 0.7% NA 0.7% 0.8% 0.8% NA |
92 8.3 6.8 10.5 12/31/12 60% 30% 35% 23% 5% 47% Spin (6/30/07) 12/31/12 Continuing to strengthen and diversify funding sources while maintaining robust liquidity Direct Deposits ABS and Other Brokered Deposits Funding Mix ($Bn) Fed Discount Window ABCP Open Lines Liquidity Reserve Contingent Liquidity Sources ($Bn) $60.2 $49.7 Note(s) 1. Includes affinity deposits $25.6 Post-12/31/12: Issued $750MM 5-year Sr. Bank Notes at 2.00% Coupon (1) |
93 13.6% 12.7% 11.9% 11.1% 11.0% 11.0% DFS C AXP BAC JPM COF Excess capital can drive shareholder returns Note(s) 1. Tier 1 common capital (non-GAAP measure) as a percent of risk-weighted assets under Basel I; see appendix for reconciliation • Despite excess capital, generating returns above 15% ROE target • Returned ~$1.4Bn in capital to shareholders in 2012 through share repurchases and dividends – Repurchased 6% of shares – Increased dividend 40% • Will deploy excess capital through – Organic growth – Dividend actions – Share repurchases – Disciplined acquisitions 26% 4% 23% 2% 12% 9% ROE Source SNL, regulatory filings. Calendar year 2012 return on equity (ROE) 4Q12 Tier 1 Common Ratio (1) |
94 Well positioned for 2013 • Greater than industry average card loan growth • Net interest margin expected to be above target • Expenses driven by prudent investments for growth • Card delinquency trends are not indicating a change in credit environment • Capital position / generation supports growth, dividend actions, share repurchases and potential acquisitions |
2013 Financial Community Briefing David Nelms Chairman & Chief Executive Officer |
The leading direct bank and payments partner |
2013 Financial Community Briefing |
98 Appendix |
99 Reconciliation of GAAP to Non-GAAP data (unaudited, $ in billions, calendar year data) 12/31/10 12/31/11 12/31/12 GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (ending loans) $3.1 $5.2 $4.7 Adjustment for Purchase Accounting Discount 0.6 0.5 0.3 Contractual Value Purchased (Private) Credit Impaired Student Loans (ending loans) (1) $3.7 $5.7 $5.0 GAAP Private Student Loans (ending loans) 1.0 2.1 3.1 Contractual Value Private Student Loans (ending loans) (1) $4.7 $7.8 $8.1 Twelve Months Ended (unaudited, $ in billions, calendar year data) 12/31/12 GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (average loans) $5.0 Adjustment for Purchase Accounting Discount 0.4 Contractual Value Purchased (Private) Credit Impaired Student Loans (average loans) (1) $5.4 GAAP Private Student Loans (average loans) 2.6 Contractual Value Private Student Loans (average loans) (1) $8.0 Twelve Months Ended (unaudited, $ in millions, calendar year data) 12/31/12 GAAP Private Student Loan Net Principal Charge-offs $19.8 Adjustment for Purchased (Private) Credit Impaired Student Loans Net Principal Charge-offs 70.8 Contractual Private Student Loan Net Principal Charge-offs (2) $90.6 Twelve Months Ended (unaudited, $ in millions, calendar year data) 12/31/12 Card Pretax Income $3,295 Non-Card Pretax Income 291 GAAP Direct Banking Pretax Income $3,586 Card Pretax Income $3,295 Card Reserve Changes 488 Card Pretax Income (Excluding Reserve Changes) $2,807 GAAP Average Card Receivables $47,539 Card Pretax Return on Assets (Excluding Reserve Changes) (3) 5.9% 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. 3. Card pre-tax return on assets excluding loss reserve changes is a non-GAAP measure and represents the pre-tax earnings of Discover's U.S. credit card business excluding changes to the allowance for loan loss reserve. Card pre-tax return on assets excluding loss reserve changes is a meaningful measure to investors because it provides a competitive performance benchmark. |
100 Reconciliation of GAAP to Non-GAAP data (cont’d) (unaudited, $ in millions, calendar year data) 12/31/2012 Tier 1 Common Equity Reconciliation Total Shareholders' Equity $9,313 Effect of certain items in Accumulated Other Comprehensive Income (Loss) excluded from Tier 1 Common Equity 72 Less: Ineligible Goodwill and Intangible Assets (475) Total Tier 1 Common Equity (1) $8,910 Risk Weighted Assets $65,522 Tier 1 Common Ratio (2) 13.6% Note(s): 2. Tier 1 Common Capital Ratio represents tier 1 common equity, a non-GAAP measure, divided by risk-weighted assets. 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. |