2015 Financial Community Briefing May 5, 2015 ©2015 DISCOVER FINANCIAL SERVICES Exhibit 99.1 |
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 historical calendar year financial data, see the Company's Current Report on Form 8-K dated March 5, 2013 and the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Throughout these materials, direct-to-consumer deposits are referred to as DTC deposits. DTC deposits include deposit products that we offer to customers through direct marketing, internet origination and affinity relationships. DTC deposits include certificates of deposits, money market accounts, online savings and checking accounts, and IRA certificates of deposit. 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.discover.com and the SEC’s website. 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 December 31, 2014 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 March 31, 2015 which is filed with the SEC and available at the SEC's website (www.sec.gov ). The Company does not undertake to update or revise forward-looking statements as more information becomes available. 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®, Freeze It SM , 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. 2 Notice |
Agenda 3 David Nelms CHAIRMAN & CHIEF EXECUTIVE OFFICER Overview Julie Loeger CHIEF MARKETING OFFICER U.S. Cards Jim Panzarino PRESIDENT – CREDIT & CARD OPERATIONS Credit Roger Hochschild PRESIDENT & CHIEF OPERATING OFFICER Payments and Other Consumer Lending Mark Graf CHIEF FINANCIAL OFFICER Funding, Capital and Financials Break Q&A |
Overview 2015 Financial Community Briefing David Nelms Chairman & Chief Executive Officer |
Executive Summary Attractive business model with a solid record of success 5 • Delivering strong card growth through new accounts, wallet share gain, lower attrition and great credit results • Proprietary network driving value for Card through brand recognition, expanding global acceptance and rewards • Leveraging a payments partnership strategy to position the business for growth • Direct Banking growth diversifying assets and funding • Capital position/generation supporting growth and robust capital deployment |
Business model has expanded and diversified 6 Loans Funding Acceptance Outlets Volume Other ABS Brokered Direct Deposits Note(s) 1. Fiscal year ending November 30, 2007 2. Includes affinity deposits 3. Includes network-to-network acceptance agreements; merchant acceptance based on third-party and internal estimates 4. Includes business-to-business volume (3) Net Income All data in billions, except Acceptance Outlets in millions (1) $53 $70 $54 $69 7 31 $186 $322 $0.6 $2.3 (4) (2) Card Non-Card 2007 2014 2007 2014 2007 2014 International Domestic 2007 2014 Credit Debit 2007 2014 |
Product diversification has leveraged large, loyal card base 7 Discover Card Student Loans Personal Loans Deposits Cross-sell / Overlap (%) (1) ~65% ~65% ~50% Note(s) 1. Cross-sell is defined as 12/31/14 percentage of accounts with another DFS relationship; Student Loan cross-sell includes co-signers • 1 in 4 U.S. households • Proprietary network |
Business model has outperformed large banks 2009-2014 Average Efficiency Ratio (1) (2) Note(s) 1. Non-interest expense divided by total revenue (net interest income and noninterest income) 2. Bank holding companies participating in the 2015 Comprehensive Capital Analysis and Review (CCAR); excludes Synchrony Financial, Santander Holdings USA, Goldman Sachs, BMO Financial, HSBC USA and Deutsche Bank from some metrics due to limited information; excludes Discover 3. 2009 adjusted to exclude $1.4 billion ($0.9 billion after taxes) Visa and MasterCard settlement 2009-2014 Average Return on Equity (3) (2) Source SNL, regulatory reports; Discover 2009-2014 CAGR Total Loan Growth (%) (2) 8 (3) 6% 3% Discover Large Banks 37% Discover Large Banks 63% 19% 6% Discover Large Banks |
The Discover Way VISION MISSION KEY PRIORITIES VALUES To be the leading direct bank and payments partner To help people spend smarter, manage debt better and save more so they can achieve a brighter financial future Grow Discover card loans while maintaining leading credit performance Expand direct consumer banking products Grow global network volume and acceptance Optimize funding, cost structure and capital position Enhance operating model including effective controls, risk management and leadership development Doing the Right Thing Innovation Simplicity Collaboration Openness Volunteerism Enthusiasm Respect 9 |
10 Discover’s Vision: To be the leading direct bank and payments partner Rewards Discover Proprietary Payment Network Risk Management Loyal Customer Base Customer Service |
Discover’s Mission & Values: Aligned with evolving regulatory landscape • Expanding regulatory oversight with new laws, regulations and statutes – Dodd-Frank enhanced prudential standards – Creation of Consumer Financial Protection Bureau (CFPB) – Capital planning rules (CCAR) • Well positioned in this environment – Business model: • Simple, direct model • Strong value propositions • Leading customer service and operations – Company culture: • Clear tone at the top • Employees who “treat you like you’d treat you” • Long-term consistent values, including “do the right thing” 11 |
Key Priorities 12 • Grow card loans while maintaining leading credit performance • Expand direct consumer banking products • Grow global network volume and acceptance • Optimize funding, cost structure and capital position • Enhance operating model including effective controls, risk management and leadership development |
Attractive business model with a solid record of success 13 • Proprietary network driving value for Card through brand recognition, expanding global acceptance and rewards • Leveraging a payments partnership strategy to position the business for growth • Direct Banking growth diversifying assets and funding • Capital position/generation supporting growth and robust capital deployment • Delivering strong card growth through new accounts, wallet share gain, lower attrition and great credit results |
U.S. Cards 2015 Financial Community Briefing Julie Loeger Chief Marketing Officer |
Outperforming peers in growth and profitability Note(s) 1. JP Morgan (Card Services excluding Commercial Card), Citi (Citi-branded cards N.A.), American Express (U.S. Card), Capital One (U.S. Card), and Bank of America (U.S. Card) 2. JP Morgan (Card Services excluding Commercial Card), Citi (Citi-branded cards N.A.), American Express, (U.S. Card) and Capital One (U.S. Card) 3. Credit card pre-tax pre-reserve ROA is defined as pre-tax credit card income adjusted for loan loss reserve changes. Discover pre-tax income excludes 4Q14 charges related to the elimination of the credit card rewards estimated forfeiture reserve. This is a non-GAAP measure: see appendix for GAAP reconciliation 2014 Loan Growth (%YOY) 2014 Net Charge-off Rate (%) 2014 Pre-tax Pre-reserve ROA (3) Source 15 (1) (1) (2) 5.6% 2.0% Discover Peer Group 2.3% 2.8% Discover Peer Group 6.9% 5.0% Discover Peer Group Public company data, calendar year |
Purchase revolving behavior driving profitable loan growth 2013 Purchase Revolvers (1) Purchase Transactors Balance Transfer/ Promotional Cash 2014 $53Bn $56Bn Note(s) 1. Balances of accounts that incurred finance charges in the period 16 |
Strong performance from new and existing customers 2013 New Accounts Wallet Share from Existing Customers Attrition Net Charge-offs 2014 $53Bn $56Bn 17 |
Discover it accelerating customer acquisition & performance 2014 (YOY) New Accounts Average FICO (1) ~730 Note(s) 1. Average 2014 acquired account FICO, weighted by credit line exposure 15% 22% -1% Purchase Balance Cost Per Account 18 |
Seeding future growth through prudent focus on students 2014 (YOY) Note(s) 1. Average 2014 acquired student account FICO, weighted by credit line exposure Average FICO (1) ~700 14% -24% New Accounts Cost Per Account 19 |
Deepening relationships with existing customers Note(s) 1. Argus Information and Advisory Services, LLC; Discover internal analysis of 3Q14 vs 3Q13; share of loans for mature active accounts 2. Loan balances and the accounts with a balance after attrition and charge-offs 71 bps 3% 2014 (YOY) Loan Balance Per Account (2) Share of Customer Loans (1) 20 |
Discover it - Miles to accelerate future growth 21 Note(s) 1. Comparison conducted by an independent research firm and based on competitor data compiled in April 2015 from company websites, customer service agents, and consumer credit offers 2. For full miles redemption terms, visit www.discover.com 3. For full version of FICO Credit Score Terms, visit www.discover.com/FICO |
Innovative features resonating strongly with customers Note(s) 1. Based on 2014 customer activity on discover.com since Free FICO feature launch • Top 5 most visited page (1) • 46% of customers actively engaged with the feature (1) • Launched April 15 th • Allows customers to freeze new purchases, if card is misplaced Free FICO Score ® Freeze It New! SM 22 |
Customers recognize Discover as cashback leader Source Best Cash Rewards Cash Rewards Penetration Source Note(s) 1. The ratio of ownership of a Discover card to total household ownership of a cashback rewards card based on survey results 2. Results based on unaided survey of each brand’s primary cardmembers 23 (1) (2) 43% 25% 21% 17% 15% 9% DFS JPM AXP BAC COF C 58% 38% 34% 32% 29% 25% DFS JPM COF AXP BAC C 2014 Consumer Payment Strategies Research Program, TNS 2014 annual averages, Brand Tracking Study, Millward Brown |
Consumer insights driving innovation in rewards Note(s) 1. Defined as growth in Discover Deals site visits since rewards program enhancements implemented in July 2014 2. Includes partner funded incremental value of the reward or discount availed by the cardmember 3. 2014 full calendar year 4. 2014 year-over-year increase in total dollar value of redemptions Redeem: Any amount. Any time. No expiration. • Over 5x growth in site visits (1) • Over $130MM in value funded by over 150 merchant partners (2) • ~25MM redemptions (3) • 25% increase in total redemptions, 35% increase at Amazon (4) 24 |
Digital driving customer acquisition and early engagement Marketing Channel (1) Accounts Booked (2) 51% 75% Note(s) 1. Percentage of 2014 new accounts solicited digitally 2. Percentage of 2014 new accounts that applied digitally (website, mobile) 25 |
Digital driving customer experience and efficiencies Customer Interactions (1) Payments (2) Mobile Logins (3) 85% 58% 35% Custom Credit Line Rewards Signup 26 Note(s) 1. 2014 digital customer interactions (logins) as a percentage of total interactions (logins and calls) 2. Percentage of 2014 payments through digital channel (website, mobile) 3. Percentage of 2014 logins through mobile channel |
Recognized as industry leader in digital Note(s) 1. Ranking represents J.D. Power Website Interaction Factor, which is a subset of J.D. Power 2014 Credit Card Satisfaction Study based on consumer opinions about the issuer of their primary credit card 2. 2014 Credit Card Scorecard Keynote digital channel ranking among American Express, Bank of America, Barclaycard, Capital One, Chase, Citi, PNC, US Bank, and Wells Fargo 3. Apple iOS and Android weighted average of app store ratings (star count) across phone and tablet devices as end of 1Q 2015 Consumer App Reviews DFS 4.5 4.5 JPM 4.0 4.5 COF 4.5 4.0 AXP 3.0 4.5 BAC 3.5 4.0 C 3.0 4.0 iOS Android 27 J.D. Power: Website Interaction Factor (1) Third Party Industry Surveys Highest Score Keynote: Digital Channel Ranking (2) Highest Score (3) SM |
Highest score in overall satisfaction Overall Satisfaction Note(s) 1. Includes general purpose consumer credit cards only; excludes charge, corporate, private label, small business and debit J.D. Power Evaluation Categories 28 709 739 756 765 766 773 773 776 789 819 819 HSBC GE C COF BAC WFC USB BCS JPM AXP DFS (1) 2014 J.D. Power |
Brand strength driving growth with customers & prospects Consideration (2) Source 29 1Q-4Q 2014 Brand Tracking Study, Millward Brown Note(s) 2. “Consideration” is the percentage of survey participants saying either “it would be my first choice” or “I would seriously consider it”; among general population 1. “Recommend to a Friend” is the percentage 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 |
Card Summary Note(s) 1. Credit card pre-tax pre-reserve ROA is defined as pre-tax credit card income adjusted for loan loss reserve changes and credit card rewards program changes that eliminated the forfeiture reserve divided by average credit card receivables. This is a non-GAAP measure: see appendix for GAAP reconciliation 2. Argus Information and Advisory Services, LLC for attrition rate data 30 Focus on prime customers who use the card to spend and borrow is driving performance: In 2014, 5.6% loan growth, 2.3% net charge-off, 6.9% pre-tax pre-reserve ROA (1) Driven by acceleration in new accounts, continued increase in wallet share with existing customers and industry low attrition rate To continue gaining market share and sustain momentum, will maintain focus: Differentiated products, features, and rewards Leading digital capabilities Exceptional customer experience Superior brand equity Delivering strong credit performance (2) |
Credit 2015 Financial Community Briefing Jim Panzarino President – Credit & Card Operations |
Credit Summary • Organizational alignment throughout customer lifecycle fosters innovation and enables rapid execution of new processes • Disciplined underwriting approach to new account growth • Credit assessment and management of total portfolio leveraging investments in data, analytics and operations • Credit environment continues to be benign 32 |
Organizational alignment enables growth, prudent credit management and customer focus Prudent profitable growth Industry leading credit management Exceptional customer experience 33 Customer Service & Operations Processing Services Workforce Management Customer Service and Credit Management Credit Risk Management Card Risk Management Fraud Consumer Lending Decision Management Credit Operations New Accounts Collections Recovery Cross functional alignment & accelerated implementation |
Superior credit performance • Disciplined new bookings • Profitability based line assignments • Proactive and targeted portfolio management • Innovative use of credit and data in decision making • Stronger payment preference through in-house collection activities Card Net Charge-off Rates Source Public company data Note(s) 1. Weighted average rate; includes U.S. card net charge-off rates for American Express (U.S. Card), Bank of America (U.S. Card), Capital One (U.S. Card), Citi (Citi-branded Cards N.A.), JPMorgan Chase (Card Services) and Wells Fargo (1Q11-1Q15) 37 bps (1) 34 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 Discover Peer Group |
Customer Account Resolution Experts (CARE) • Dedicated account manager • Specialized training • Contact by appointment • Custom tailored payment solutions • Increased customer engagement “I like the fact that it’s more personal CARE Process Collections Approach Decline in delinquency during second cycle 5.1% Example: Customers with high risk attributes entering collections for the first time 35 and I don’t have to repeat my situation each time I speak to Discover Card. ” -CARE Customer |
Growing new accounts while managing credit risk Card Vintage Gross Loss Rate (1) New Account Bookings (MM) Note(s) 1. Blended vintage 6-month moving average gross principal charge-off rate (excludes recoveries) 36 2010 2011 2012 2013 2014 0 4 8 12 16 20 24 2002-2006 Historical Benchmark 2010-2013 |
Growing card receivables while managing credit risk Receivables ($Bn) 30+ Delinquencies (%) 37 Note(s) 1. Calendar year end figures (1) (1) $51 $56 2012 2014 10% 1.79% 1.73% 2012 2014 6 bps |
Where is credit headed? • Credit performance across all products remains benign • Quarterly card net charge-off rates are expected to remain below 3% through at least the end of 2016 absent any external shock Card 30+ Delinquency Rate (1) Note(s) 1. Monthly figures through March 2015 38 1.64% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% |
Attractive business model with a solid record of success • • • • 39 Delivering strong card growth through new accounts, wallet share gain, lower attrition and great credit results Proprietary network driving value for Card through brand recognition, expanding global acceptance and rewards Leveraging a payments partnership strategy to position the business for growth Direct Banking growth diversifying assets and funding Capital position/generation supporting growth and robust capital deployment |
Payments and Other Consumer Lending 2015 Financial Community Briefing Roger Hochschild President & Chief Operating Officer |
Payments sources of value Payments Assets Significant Value to Card • • • • Independent Value Creation • • • 41 Brand recognition Merchant funded rewards Emerging technologies Flexibility and control Traditional third-party transaction processing Nontraditional partnerships Business-to-business |
Discover American Express Visa / MasterCard Proprietary network drives brand recognition and increasing acceptance Source 2014 Millward Brown Brand Tracking Study Average Unaided Card Brand Awareness Domestic Acceptance Growth Source The Nilson Report, February 2005 and February 2015 issues 2004 2014 2004 2014 2004 2014 +111% +86% +67% 42 59 56 28 28 18 13 DFS AXP COF JPM C BAC 4.4 3.7 5.7 9.3 6.9 9.5 |
Cash rewards program – leveraging merchant relationships • Deals platform provides actionable insight and rapid campaign turnaround • Secured merchant campaigns up significantly year-to-date due to strong test campaign performance Indexed Merchant-Funded Rewards (1) Note(s) 1. Indexed to 100; includes Discover Deals, estimated point-of-sale coupons, CBB offers, statement credits and gift card redemptions 43 100 12 112 Discover Funded Partner Funded Customer Cash Reward |
Continued focus on payments security • Discover owns one of four EMV specifications in the U.S. that are being loaded on merchant terminals • Expecting to issue EMV cards to majority of active accounts in 2015 and be ready for October 2015 liability shift • Increased costs in 2015 due to issuance of chip cards, expect fraud savings to ramp up in 2016 • Tokenization for mobile and card not present transactions – Currently in testing phase – Launching Apple Pay in fall of 2015 • Opportunities to offer additional digital services 44 |
Positioning Payments business for the future Industry Trends 45 Consumer shift to electronic payments Continued intense competition in debit International growth B2B payments electronification Commerce and payments convergence |
Defend PULSE PIN position and increase signature debit PIN Signature • Building pipeline • Long sales cycle 46 Debit Enable PIN, PINless and signature transactions at the point of sale and online |
Expand in target markets Grow and expand Maximize growth Stabilize and transition Diners Club Alliance Partners Grow international partnerships in target markets 47 (Japan) (Italy) (China) (Japan) (S. Korea) (China) (Turkey) (India) (Middle East) (Canada) (Mexico) |
• Flexible partner in rapidly changing payments landscape – Alternative to Visa/MasterCard – White label opportunities (e.g., PayPal) – Full product suite (credit, debit, prepaid) • Proprietary network enables partnership in all areas of mobile commerce – Mobile Points of Sale (Merchant capabilities) – Mobile Payments (Customer capabilities – mobile wallets, merchant wallets, NFC, QR codes, bar codes) – Mobile Marketing (e-coupons) Capitalize on evolving payment technology 48 1 2 • 5 buyer agreements in place • 2,200+ suppliers boarded • Award winning innovation (1) Future Digital Services • Note(s) 1. Token services leveraging the digital platform currently in development 2015 PYMNTS Innovator Awards for Most Disruptive Company and Best B2B Innovation |
Attractive business model with a solid record of success 49 Delivering strong card growth through new accounts, wallet share gain, lower attrition and great credit results Proprietary network driving value for Card through brand recognition, expanding global acceptance and rewards Leveraging a payments partnership strategy to position the business for growth • • Direct Banking growth diversifying assets and funding Capital position/generation supporting growth and robust capital deployment |
Consumer lending product offerings aligned to Discover business model Business model matched to market characteristics Other considerations • • • • 50 Market size Competitive set Brand fit Cross-sell potential Direct Model Prime Credit Risk Profit Potential Consumer Lending Products Credit Card Personal Loans Student Loans Home Loans Auto Loans |
Driving profitable growth in personal loans Overview Personal Loans ($Bn) • Good alternative for consolidating debt • Typical installment loan characteristics: 51 0% 2% 4% 6% 8% 10% $0 $1 $2 $3 $4 $5 2009 2010 2011 2012 2013 2014 Total Loans Outstanding 6 Month Lagged Charge-off Rate • Average FICO of ~750 • ~65% of portfolio has another Discover relationship • Portfolio to date built almost entirely “by invitation only” 3-5 year term 300-400bps rate reduction |
Discover’s personal lending product is well positioned in competitive environment • New marketplace competition - Mail volumes have increased - Raising awareness of product - Focused on broader credit segment • Business models often based on originate and sell with little to no risk retention • Rapid growth in low interest rate, benign credit environment, unproven through cycle New Entrants Discover’s Position • Leveraging brand and customer experience • Prime segment focus with credit and collections expertise developed through cycles • Retaining loans on the balance sheet with diversified funding 52 |
Not all personal loans deliver the same advantages 53 Note(s) 1. Comparison conducted by an independent research firm and based on data compiled in March 2015 from company websites, customer service agents, and consumer credit offers 2. Wells Fargo APR range is based on a $5,000 loan with a 36-month term 3. Origination fee estimates are based on average loan amount and average origination fee % listed in company filings (10-Q) |
Home lending update Mortgage Originations ($Bn) Note(s) 1. Freddie Mac conforming mortgage rates, quarterly averages Purchase Refinance 30 Yr Fixed Mortgage Rates (1) 54 2.0% 3.0% 4.0% 5.0% $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 |
Home equity market is another opportunity for growth Discover’s Position • Complements personal loans • Leveraging brand and customer experience • Credit expertise • ~80% of Discover cardmembers own their own home Home Equity Industry Originations ($Bn) Source Moody’s Economics database 55 $79 $120 $26 $24 2012 2014 HE Line of Credit HE Installment Loan |
• Target not-for-profit schools with 4-year undergraduate or graduate degree programs, bar and residency loans Generating organic growth in private student loans Overview Note(s) 1. Placement of Discover brand at schools that use a lender list; based on 2015 U.S. News and World Report online rankings 2. Includes CitiAssist branded originated loans for 2011 and 2012 Student Loan Receivables ($Bn) (2) YOY (12%) 22% 56 1.0 2.1 3.0 4.0 4.9 $4.1 $7.3 $7.7 $8.1 $8.5 2009 2010 2011 2012 2013 2014 0.6 Purchased Organic • Fixed and variable interest rates, no origination fees 99 of top 100 national universities (1) All top 50 graduate business, medical and law schools (1) |
• Strong credit characteristics (1) Disciplined underwriting approach drives better student loan credit performance Underwriting Approach 2014 Net Charge-off Rate (%) Note(s): 1. Reflects organic originations; FICO is the higher of either the borrower or cosigner, weighted by loan balance 2. Defined as 3Q14 annualized net losses to 3Q14 average managed contractual receivables, which is a non-GAAP measure; see appendix for a reconciliation 3. Based on MeasureOne industry net charge-off rates for 3Q14 annualized; Industry data includes: The First Marblehead Corporation, PNC Bank, RBS Citizens, Sallie Mae, Sun Trust Banks, Navient, and Wells Fargo Bank (2) (3) 57 • School certification for all borrowers and direct disbursement of funds to school Cosigner rate approximately 90% Average FICO greater than 750 at acquisition 0.9% 1.9% Discover Other Private Lenders |
Discover product awareness expected to drive growth Priorities for 2015 and Beyond Note(s) 1. December 2014 Measure One report: industry-wide private student loan disbursements; Sallie Mae company reports • Grow brand awareness • Expand integrated marketing campaigns • Enhance customer experience • Increase borrower assistance options 2014 Private Student Loan Industry Originations (1) Total Size: $7.1Bn 2010 – 2014 CAGR: 7% 58 Sallie Mae 55% Discover 16% Other 29% |
Not all student loans are created equal 59 Note(s) Comparisons based on information obtained on lenders’ websites or from customer service representatives as of March 2015. At least a 3.0 GPA (or equivalent) qualifies for a one-time cash reward of 1% of the loan amount of each new Discover student loan. Reward redemption period is limited |
Consumer Lending Summary Well positioned for profitable growth in personal loans despite competitive environment Home lending business continues to face challenges in growing purchase market originations Continuing to pursue growth opportunity in home equity market Student loan business expected to grow as tuition, enrollment and Discover product awareness increases Targeting 5-10% long-term receivables growth in other consumer lending 60 |
Attractive business model with a solid record of success 61 Direct Banking growth diversifying assets and funding Capital position/generation supporting growth and robust capital deployment Delivering strong card growth through new accounts, wallet share gain, lower attrition and great credit results Proprietary network driving value for Card through brand recognition, expanding global acceptance and rewards Leveraging a payments partnership strategy to position the business for growth |
Funding, Capital and Financials 2015 Financial Community Briefing Mark Graf Chief Financial Officer |
Financial considerations for 2015 and beyond • Positioning liabilities for rising rates, tailwind from lower funding costs completed • Provisioning largely driven by loan growth, credit quality remains relatively stable • Core expense growth is well disciplined, in 2015 expense growth expected to be driven by some non-recurring items • Robust capital position supporting growth, share repurchases and dividend actions 63 |
Continuing to strengthen and diversify funding sources Funding Mix ($Bn) $49.7 Note(s) 1. Includes unsecured debt and other funding 2. Includes affinity deposits $68.7 Direct-to-Consumer Deposits ($Bn) (2) Other (1) Brokered Deposits ABS Direct Deposits (2) 64 $3 $7 $13 $21 $27 $28 $28 $29 2007 2008 2009 2010 2011 2012 2013 2014 5% 42% 35% 25% 54% 25% 6% 8% Spin (6/30/07) 4Q14 |
Optimizing deposit product mix to manage rate sensitivity Indeterminate Balance Acquired at 10%+ Above Competitor Rates (1,2) Note(s) 1. Indeterminate Balances defined as savings and money market balances 2. Competitor Rates reflects monthly average of rates posted online by peer banks, which include banks without a traditional branch network Indeterminate Balances as a % of Deposits Portfolio (1) 65 39% 29% 2011 2014 48% 58% 2011 2014 |
• 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 long term cost of funds with checking product Strategic Rationale Note(s) Checking product currently limited to existing deposit and card customers 66 |
Discover direct deposit betas will be less than “1” • Similar to “traditional” bank, strong synergy between right and left hand side of balance sheet ~65% of depositors have a loan product relationship with DFS ~80% of new deposit accounts have a loan product relationship with DFS • Different from “traditional” bank… Note(s) 1. Defined as the ratio of expected change in deposit pricing relative to Federal Reserve increases in short term interest rates 67 0.0 0.5 1.0 Traditional Bank Deposit Pricing Discover DTC Deposit Pricing Brokered CD Pricing DFS vs. Traditional Bank Illustrative Betas (1) Checking deposits are still relatively small (<1% of DFS funding) Funding stack relies on ABS, direct deposits and brokered deposits |
Funding costs will increase as we continue to position the balance sheet for rising rates Cost of Funds (1) Note(s) 1. Rate on total interest-bearing liabilities 2. Excludes all indeterminate maturity deposits (savings and money market) and preferred stock; includes derivatives and hedging activities Avg Months to Liability Repricing (2) 68 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 2.2% 2.4% 2.6% 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 16 26 1Q12 1Q15 |
Lower funding costs drove NIM expansion in recent past 2012-2014 Net Interest Margin Note(s) 1. Includes interest income on all interest earnings assets (1) • Expect modest 2015 NIM compression driven by funding costs and card yield • Expect to be at or above 9.5%, on an annual basis, at least through 2016 69 9.29% (0.16%) 0.15% 0.53% 9.81% 2012 Gross Yield Interest Charge-off Interest Expense 2014 |
Discover is slightly asset sensitive 1-Year Net Interest Income Impact from 100bps Parallel Shift (1) Note(s) 1. Calculated based on reported net interest income impact divided by period ending net interest income. Capital One (COF) estimated using 200 basis point parallel shift divided by 2 to approximate 100 basis point parallel shift Source 4Q14 Company disclosures 70 BAC JPM C COF DFS AXP -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% |
Revenue growth has outperformed peers but certain fee revenue categories face headwinds 2014 Revenue Growth (YOY) (1) • Protection Products Revenue – expect continued decline • Other Income – Mortgage gain on sale volatility driven in part by refi market • Payment Services Revenue – continued negative competitive impact, B2B volume growth strong but lower margin Note(s) 1. Revenues net of interest expense; American Express (U.S. Card), Capital One (U.S. Card), Citi (Citi-branded Cards N.A.), JPMorgan Chase (Card Services) and Discover (Direct Banking segment) excludes elimination of rewards forfeiture reserve of $178 million from 2014 Fee Revenue Categories 71 5.6% 4.8% 1.0% -2.8% -4.7% DFS AXP C JPM COF |
Total charge-off rate remains low and 2014 profits not driven by reserve releases Card Credit Trends Note(s) 1. Reserve release/build divided by pre-tax profit; American Express (U.S. Card), Capital One (U.S. Card), Citi (Citi-branded Cards N.A.), Discover (Direct Banking segment) and JPMorgan Chase (Card Services) 2014 Reserve Release/Build Contribution to Pre-tax Profit (1) 72 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% Reserve Rate Net Charge-off Rate -4% -3% -1% 6% 22% AXP DFS COF JPM C |
Recent vintage performance is better than historical but seasoning of growth will drive provisioning 2010-2013 Card Vintage Gross Loss Rate (1) Note(s) 1. Blended vintage 6-month moving average gross principal charge-off rate (excludes recoveries) % of Card Portfolio on Book for <3 Years 73 0 4 8 12 16 20 24 2002-2006 Historical Benchmark 2010-2013 10% 11% 12% 13% 14% 15% 16% 17% 18% Jan-12 Jan-13 Jan-14 |
Higher costs in 2015 driven by some non-recurring items Total Expense ($Bn) Note(s) 1. Defined as reported noninterest expense divided by total revenue (net interest income and noninterest income) 2. Adjusted efficiency ratio excludes charges associated with Diners Club from 2013 results and one-time charges associated with the rewards forfeiture change, Diners Club and Discover Home Loans from 2014 results. See appendix for reconciliation Efficiency Ratio (1) 38.8% 39.4% -- Adj. Efficiency Ratio (2) 38.4% 38.0% • 2015 will be impacted by – AML/BSA program remediation – EMV roll out – 1Q15 legal reserve – Debit litigation • Continue to target long-term efficiency ratio of 38%+/- for the total company 74 $3.2 $3.3 $3.5 2013 2014 2015E |
Strongest capital ratio in stress scenario Source Federal Reserve Dodd-Frank Act Stress Test 2015: Supervisory Stress Test Methodology and Results, Table 3. Projected stressed capital ratios under the severely adverse scenario, DFAST Severely Adverse Results Min. Common Equity Tier 1 Capital Ratio 75 13.3% 13.0% 9.4% 7.1% 6.8% 6.3% DFS AXP COF BAC C JPM 2014:Q4-2016:Q4; 31 participating bank holding companies |
Planned capital actions generate highest yield Estimated Dividend and Buyback Yield (1) Note(s) 1. CCAR announced capital actions (buybacks and dividends) pro-rated for four quarters ending 1Q16 divided by market capitalization as of 4/30/15 Source Public company disclosures 76 9% 8% 8% 5% 4% 3% DFS AXP COF JPM C BAC Dividend Buyback |
Excess capital can help drive shareholder returns Note(s) Common Equity Tier 1 Capital Ratio (1) 11% Target $2.5Bn+/- 77 14.7% 1Q15 1. Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in common equity tier 1 capital, a non-GAAP measure. The Company believes that the common equity tier 1 capital ratio based on fully phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of common equity tier 1 capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assets calculated under Basel III transition rules, see appendix dividend actions – Portfolio purchases – Disciplined acquisitions – Organic growth – Share repurchases and • Long-term capital priorities: |
Key long-term targets remain largely the same Card Loan Growth 3-5% Non-Card Lending Growth 5-10% Payments Volume Growth 10%+ Total Company NIM 9%+/- Card Net Charge-Offs 3.5-4.5% Efficiency Ratio 38%+/- Common Equity Tier I Ratio (Basel III) 11% ROE 15%+ 78 Near-term Long-term |
2015 Guidance Category Target Rationale Revenue Margin (1) Modest Decline • Modest net interest margin compression • Lower protection products revenue • Higher rewards rate • Payments volume Provision for Loan Losses Rate (1) 2.5%+/- • Seasoning of new vintages and modestly lower recoveries on aged charge-offs Operating Expenses $3.5Bn+/- • Higher marketing, regulatory/compliance and technology costs Note(s) 1. As a percentage of average receivables 79 |
Conclusion • Loan growth at high end of range • Net interest margin expected to remain above long-term target • Only modest increase in “core” operating expenses near-term • Card delinquency trends do not indicate a change in credit environment • Capital position/generation supports growth, share repurchases and dividend actions 80 |
Q&A 2015 Financial Community Briefing |
Reconciliation of GAAP to Non-GAAP Data Note(s) 1. Credit card pre-tax return on assets excluding the forfeiture reserve elimination and loss reserve changes is a non-GAAP measure and represents pre-tax earnings of Discover's U.S. credit card business excluding the impact of the elimination of the credit card rewards program forfeiture reserve and changes to the allowance for loan loss reserve. Credit card pre-tax return on assets excluding the forfeiture reserve elimination and loss reserve changes is a meaningful measure to investors because it provides a competitive performance benchmark 82 Twelve Months Ended (unaudited, $ in millions) 12/31/14 GAAP Direct Banking pre-tax income $3,605 Excluding non-credit card pre-tax income 228 Credit card pre-tax income $3,377 Excluding elimination of credit card rewards program forfeiture reserve 178 Excluding credit card reserve changes 68 Credit card pre-tax income excluding forfeiture reserve and reserve changes $3,623 GAAP average credit card receivables $52,600 Credit card pre-tax return on assets (excluding forfeiture reserve and reserve changes) (1) 6.9% |
Reconciliation of GAAP to Non-GAAP Data (cont’d) Note(s) 83 (unaudited, $ in billions) Three Months Ended 9/30/2014 GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (average loans) $3.9 Adjustment for Purchase Accounting 0.2 Contractual Value Purchased (Private) Credit Impaired Student Loans (average loans) (1) $4.1 GAAP Private Student Loans (average loans) 4.5 Contractual Value Private Student Loans (average loans) (1) $8.6 (unaudited, $ in millions) Three Months Ended 9/30/2014 GAAP Private Student Loan Net Principal Charge-offs $12.8 Adjustment for Purchased (Private) Credit Impaired Student Loans Net Principal Charge-offs 6.1 Contractual Private Student Loan Net Principal Charge-offs (2) $18.9 Contractual Net Charge-off Rate 0.9% 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 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 |
Reconciliation of GAAP to Non-GAAP Data (cont’d) Note(s) 1. Adjusted operating efficiency is calculated using adjusted operating expense divided by adjusted revenue net of interest expense, a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the company's reported results. Management believes this information provides investors with a useful metric to evaluate the ongoing operating performance of the company 84 Twelve Months Ended Twelve Months Ended (unaudited, $ in millions) 12/31/14 12/31/13 Revenue net of interest expense $8,477 $8,224 Excluding Elimination of credit card rewards program forfeiture reserve 178 - Adjusted revenue net of interest expense (excluding one-time charge) $8,655 $8,224 Total operating expense $3,340 $3,194 Excluding Discover Home Loans goodwill impairment (27) Excluding Diners Club Italy held-for-sale fair value adjustment (21) Excluding Diners Club international franchise support - (40) Adjusted operating expense (excluding one-time charges) $3,292 $3,154 Adjusted operating efficiency (excluding one-time charges) (1) 38.0% 38.4% |
Reconciliation of GAAP to Non-GAAP Data (cont’d) Note(s) 1. Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion[ 2. Key differences under fully phased-in Basel III rules in the calculation of risk-weighted assets include higher risk weighting for past due loans and unfunded commitments[ 3. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. We reported under Basel I at December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014 4. Common equity tier 1 capital ratio (Basel III fully phased-in) is calculated using common equity tier 1 capital (Basel III fully phased-in), a non-GAAP measure, divided by risk weighted assets (Basel III fully phased-in) 85 Quarter Ended (unaudited, $ in millions) 3/31/15 Common equity Tier 1 capital (Basel III transition) $10,497 Adjustments related to capital componentes during transition (1) (87) Common equity Tier 1 capital (Basel III fully phased-in) $10,410 Risk weighted assets (Basel III transition) $70,864 Risk weighted assets (Basel III fully phased-in) (2) $70,757 Common equity Tier 1 capital (Basel III transition) (3) 14.8% Common equity Tier 1 capital (Basel III fully phased-in) (3,4) 14.7% |