![]() Barclays Americas Select Franchise Conference Mark Graf EVP & Chief Financial Officer May 15, 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 and in the Company's Current Report on Form 8-K dated May 15, 2012, 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, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2012, 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. |
![]() 3 Our Direct Banking and Payments strategy is delivering profitable growth • 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 • Increasing acceptance globally and exploiting opportunities in payments – New network/acquirer/issuer partnerships driving acceptance and volume – Aggressively pursuing alternative payments • Deploying excess capital to drive shareholder value |
![]() 4 Become the leading direct banking and payments company Note: 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 • $27Bn direct-to-consumer deposits • $10Bn personal loans and private student loans Deposits and Other Lending Deposits and Other Lending U.S. Card Issuing U.S. Card Issuing • $143Bn volume • 4,300 issuers • $113Bn volume • 30+ issuers • $29Bn volume • 80+ licensees • 185+ countries / territories Direct Banking Direct Banking Payment Services Payment Services |
![]() 5 2012 strategic priorities 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 Banking products • Increase private student and personal loans with strong credit and profit performance • Launch direct checking, complete acquisition of Home Loan Center business and launch Discover Home Loans 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 |
![]() 6 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 more information |
![]() 7 -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 DFS (CY) Industry Delivering better than industry card loan growth and credit performance Loans (%YOY) Net Charge-off Rate (%) Source SEC Filings, calendar year data, internal estimates 0% 2% 4% 6% 8% 10% 12% 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 Discover Peer Group (2) (1) 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); periods prior to 3Q08 adjusted to include estimated WaMu receivables 2. Weighted average rate; includes U.S. card net charge-off rates for Citibank , JP Morgan Chase, Capital One, American Express and Bank of America |
![]() 8 A leader in cash rewards 68% 44% 34% 25% 24% 22% DFS JPM AXP COF C BAC Best Cash Rewards (1) Cash Rewards Household Penetration (2) Note(s) 1. 4Q 2011 Brand Tracker study, Millward Brown - % 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 2. 2011 TNS Consumer Card Research - Household ownership of cash rewards cards; percentages add to more than 100% due to household use of multiple brands 68% 44% 34% 25% 24% 22% DFS JPM AXP COF C BAC |
![]() 9 2007 2011 Active Outlet Growth Highlights Significant gains in U.S. acceptance in 2011 • 40%+ increase since moving to open acquiring model • 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 2007 – 2011 CAGR: 7% |
![]() 10 2009 2010 2011 Increasing card usage driving wallet share of loans Wallet Share of Loans (2) 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 2009 – 2011 Growth |
![]() 11 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% Loan 3.3% P&L (1) Revenue Margin 14.1% Net Charge-offs 4.5% Operating Expenses 4.8% ROA (2) 4.8% 2011 Card Business Model Performance |
![]() 12 2.1 5.3 $0.1 $0.6 $1.0 $7.3 2008 2009 2010 2011 Private Student Loans: Valuable source of funding for students Source College Board, Trends in Student Aid (2011); excludes family contribution totals Private Loans $6 Grants and Other $125 Federal Loans $104 Total: $235Bn Sources of U.S. Educational Funding (2011) Discover Private Student Loan Growth ($Bn) % in Repay (2) 1% 8% 20% 66% Acquired (1) Note(s) 1. Purchase credit impaired loan value. Contractual receivables, a non-GAAP measure, were $5.7Bn at 11/30/11. See appendix for reconciliation 2. Includes loans in forbearance but excludes loans in deferment for period end |
![]() 13 Superior credit performance in private student loans 2011 Portfolio Net Charge-off Rates Underwriting Approach Source Company filings for Sallie Mae, calendar-year figures for Discover 1.0% 2.9% DFS SLM Note(s) 1. Average cosigner rate and average FICO are for the organic portfolio as of the end of fiscal year 2011 2. Defined as net losses to average managed contractual receivables which is a non-GAAP measure for DFS, see appendix for reconciliation 3. Defined as net losses to average receivables for the private education loan portfolio • Card underwriting capabilities leveraged to enhance decision making • High cosigner rate – 90% (1) • High origination FICO – 750 (1) • Focus on not for profit 4-year colleges and graduate schools • School certification and direct disbursement of funds to schools (2) (3) |
![]() 14 Student loans delivering attractive returns Net Interest Income Loss Provision Operating Expenses Pre-tax ROA 5% (1%) (1.5%) 2.5% • Continued enhancement of underwriting capabilities • Higher repeat business and cross- sell penetration • Targeted graduate and professional degree products • Introduction of differentiated loan types 2012 Focus Targeted Returns (1) Note(s) 1. Over life of loan |
![]() 15 Personal Loans: Natural adjacency with attractive returns Overview Personal Loan Growth ($Bn) $1.0 $1.4 $1.9 $2.6 2008 2009 2010 2011 • Superior alternative for consolidating debt • Judgmental underwriting with cash flow analysis • 60%+ from cross-sell, expanding further into broad market • Average loan life at origination of ~5 years • Opportunities to leverage this platform in areas other than debt consolidation 2008 – 2011 CAGR: 38% |
![]() 16 Personal loans delivering superior credit performance with attractive returns Source Calendar year data; Industry - credit bureau data (10% sample) 60+ Delinquency rates Net Interest Income Loss Provision Operating Expenses Pre-tax ROA 9% (4%) (2%) 3% Targeted Returns (1) 1.0% 3.6% 0.6% 2.5% Discover Industry 2010 2011 |
![]() 17 Acquisition of Home Loan Center business provides a low cost, targeted expansion path into home loans • Structured as asset purchase with no legacy portfolio exposure • Experienced management team • Proprietary direct-to-consumer technology platform scalable to accommodate future growth • Acquisition scheduled to close mid-year Acquisition Business Model • Fee-based model, loan assets sold to investors with servicing released • Primarily 1 st lien conforming loans • Marketing efforts directed to Discover customers and online lead aggregation • Streamlined service delivery processes differentiated for purchase and refinance |
![]() 18 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) • 845,000+ ATMs • 21MM+ acceptance locations • Settle in 27 currencies Owned Network Alliances Note(s) 1. FY 2011 data |
![]() 19 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 |
![]() 20 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) Partner Issuance Proprietary 2007 – 2011 CAGR: 46% 2007 – 2011 CAGR: 11% |
![]() 21 Expanding global acceptance to drive growth • Third largest global card acceptance network (2) • Complementary networks with strong global presence • Operates in over 185 countries / territories (3) • Over 845,000 ATMs in more than 100 countries North America 8.8MM Asia Pacific 7.1MM EMEA 2.0MM Latin America 2.9MM Note(s) 1. Total reflects the number of merchant outlets that accept one or more card brands 2. The Nilson Report #989, March 2012 3. The map denotes countries or territories with transactional activity in the last year 4. Enablement of ~90k Rupay ATMs expected by 3Q12 Total Merchant Locations 20.8MM (1) (4) |
![]() 22 Building momentum in international acceptance Dec ’10 Sep ’11 Sep ’11 Nov ’11 Jan ’12* Oct ’11 Feb ’12 Apr ’10 Source 2012 Nilson Issue #989 |
![]() 23 Adding Issuers • First step in growing volume and revenue • In 2011, PULSE added 129 new direct issuer participants Navigating debit industry changes to drive profitable volume growth Other Factors • Competitors’ new debit strategies may negatively impact volume • Merchant / Acquirer routing sophistication • Industry pricing changes 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 |
![]() 24 • 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 |
![]() 25 Helping shape the emerging payments landscape Consumers Merchants Issuers DFS Leveraging the network for new technology solutions • NFC acceptance parity • 90+ EMV initiatives worldwide • 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 |
![]() ![]() 26 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 |
![]() 27 Funding cost tailwind helping to offset yield compression -5.0% 0.0% 5.0% 10.0% 15.0% 2008 2011 Total Yield Cost of Funds NIM Credit Card Receivables Mix by APR Net Interest Margin (NIM) Note(s) 1. Interest expense divided by average receivables 2. Net interest income divided by average receivables Source Fiscal year ending data (1) (2) 52% 66% 26% 18% 16% 22% 2008 2011 Promotional Standard Cash and Other |
![]() 28 Source SNL, Fed Call Reports and Boston Consulting Group / internal analysis Operating Costs Net of Fee Income (3) Gained meaningful ground on cost-of-funds and all-in economics Deposit Rates 50 100 150 0 Discover non-interest expense 120 bps 600 450 300 150 0 Largest Traditional Banks (1) Discover Bank 2007 2008 2009 2010 2011 128bps (2) 239bps Note(s) 1. 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 2. As of 4Q11 3. Total operating costs net of fee income divided by average total deposits portfolio balance 4. 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 Source SNL (bps) Other large U.S. bank non-interest expense (4) (bps) |
![]() 29 6.8 8.9 $27.7 12.1 2/29/12 ABS BCDs DTC (1) Other Diversified funding with strong liquidity 28% 35% 21% 46% 54% 5% 6% 4% Spin (6/30/07) 2/29/12 Funding Mix ($Bn) Liquidity Portfolio ABCP Open Lines Fed Discount Window Contingent Liquidity Sources ($Bn) $58.9 $49.7 Note(s) 1. Includes affinity deposits |
![]() 30 Capital position enables effective capital deployment • Repurchased $425MM in shares during 2H ‘11 and authorized new two-year 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 $2.7 $5.7 3/31/12 Illustrative Target Excess Capital Target Tier 1 Common Ratio (1) 9.5%+/- Target 14% Source Company 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 |
![]() 31 • Growing receivables, sales and profits in card • Diversifying our lending portfolio • Increasing acceptance globally and exploiting opportunities in payments • Deploying excess capital to drive shareholder value Our Direct Banking and Payments strategy is delivering profitable growth |
![]() Barclays Americas Select Franchise Conference May 15, 2012 |
![]() 33 Reconciliation of GAAP to Non-GAAP data ( $MM) 3/31/2012 Tier 1 Common Equity Reconciliation Total Shareholders' Equity $8,703 Effect of certain items in Accumulated Other Comprehensive Income (Loss) excluded from Tier 1 Common Equity 59 Less: Ineligible Goodwill and Intangible Assets (441) Total Tier 1 Common Equity (1) $8,321 Risk Weighted Assets $59,526 Tier 1 Common Ratio (2) 14.0% 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. |
![]() 34 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 Contractual Value Private Student Loans (ending loans) (1) $7.8 $7.7 (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. |