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8-K - FORM 8-K - Discover Financial Servicesd438636d8k.htm
November 13, 2012
David Nelms, Chairman & Chief Executive Officer
Bank of America Merrill Lynch
2012 Banking & Financial Services Conference
Exhibit 99.1
©
2012 DISCOVER FINANCIAL SERVICES


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.
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;
“Management’s
Discussion
and
Analysis
of
Financial
Condition
and
Results
of
Operations”
in
the
Company’s
Quarterly
Reports on Form 10-Q for the quarters ended February 29, 2012, May 31, 2012 and August 31, 2012; and “Risk
Factors”
in the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2012, which are 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
®
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
Overview:
Executing on direct banking and payments strategy
Grow receivables, sales and profits in card
Use brand, service and rewards competitive advantages to grow share
Leverage credit risk management capabilities to maximize returns
Diversify our lending portfolio
Apply unsecured lending and marketing capabilities to drive asset growth
Generate attractive risk-adjusted returns from student and personal loans
Increase acceptance globally and exploit opportunities in payments
New network/acquirer/issuer partnerships drive acceptance and volume
Aggressively pursue alternative payments
Deploy excess capital to drive shareholder value


4
Discover Card:
Leveraging and strengthening our competitive advantages
Rewards
Brand
Online and Mobile
Customer Service
#1
in
customer
loyalty
for
16
years
(1)
One of the top 2 cards that cardholders
would
recommend
to
a
friend
(2)
Recognized by multiple national surveys as
one of the top customer service providers
Note(s)
1.
2012 Brand Keys Customer Loyalty Engagement Index Report
2.
3Q 2012 Millward Brown Brand Tracker Study
100% U.S.-based
employee customer
service strategy


5
Discover Card:
Delivering strong loan growth and credit performance
Loans (%YOY)
Net Charge-off Rate (%)
Source
SEC Filings, calendar year data, internal estimates
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. HSBC and 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
Citi
(Citi-branded
Cards
N.A.),
JPMorgan
Chase
(Card
Services),
Capital
One
(Domestic
Card),
American Express (U.S. Card) and Bank of America (U.S. Card)
(1)
(2)
0%
2%
4%
6%
8%
10%
12%
1Q08
3Q09
1Q11
3Q12
Discover
Peer Group
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
1Q08
3Q09
1Q11
3Q12
DFS (CY)
Peer Group


6
Discover Card:
Driving better than peer returns
Note(s)
1.
Trailing four quarters calendar year data as of quarter ended 9/30/12; see appendix for Discover GAAP reconciliation
2.
Competitors include American Express (U.S. Card), Bank of America (Card Services), 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)
Pre-Tax Card ROA
(excluding change in loan loss reserves)
(1,2)
6.0%
5.9%
5.0%
3.4%
2.9%
1.8%
AXP
DFS
COF
BAC
JPM
C


7
Private Student Loans:
Financing source that complements federal student loans
Source
College Board, Trends in Student Aid (Preliminary 2012);
excludes family contribution totals
Sources of Education Funding
Discover Student Loans
Fixed or variable interest rates
Zero origination fees
Eligibility based on credit scores
with high cosigner rates
Non-profit schools with 4-year
undergraduate or graduate degree
programs
Federal Student Loans
Fixed interest rates
1-4% origination fees
Not based on credit scores
Non-profit and for-profit schools,
including 2-year and non-degree
programs
Total: $244Bn
Grants and
Other
$133
Federal Loans
$105
Private Loans
$6


8
Private Student Loans:
Strategic purchases complement strong organic growth
YTD 2012 Managed
Net Charge-off Rates
Note(s)
1.
Contractual receivables is a non-GAAP measure, see appendix for reconciliation
2.
Based on contractual loan data; includes loans in forbearance but excludes loans in deferment for period end
3.
Defined as net losses to average contractual receivables which is a non-GAAP measure for DFS, see appendix for reconciliation
4.
Defined as net losses to average receivables for the private education loan portfolio
% in
Repay
1%
8%
20%
66%
Acquired Portfolios
66%
Contractual Private Student
Loan Growth ($Bn)
(4)
Source
Company filings for Sallie Mae, calendar-year figures for Discover
(3)
(1)
(2)
2.1
2.8
5.7
5.2
$0.1
$0.6
$1.0
$7.8
$8.0
2008
2009
2010
2011
3Q12
1.0%
2.7%
DFS
SLM


9
Private Student Loans:
Achieving 2012 initiatives
Added to lender list at 50 more schools bringing total schools to ~1,300
Continued enhancement of underwriting capabilities
Higher repeat business and cross-sell penetration
Targeted graduate and professional degree products
Introduced fixed rate student loans


10
Discover Home Loans:
Acquisition provides targeted expansion path
Purchased Home Loan Center
assets for ~$56 million
Proprietary direct-to-consumer
technology platform scalable to
accommodate future growth
Closed in June 2012
Acquisition
Business Model
Fee-based model, loan assets sold
to investors with servicing released
1
st
lien
conforming
&
FHA
loans
Marketing efforts directed to
Discover customers and online
lead aggregation


Discover Home Loans:
Successfully launched home loan product
11


12
PULSE:
Driving profitable volume growth
Transaction Growth (YOY)
Momentum in new issuer
additions continues in 2012
Short-term acquirer agreements
and disciplined approach to
routing incentives have resulted
in profitable volume growth and
increased market share
Competitors’
new debit
strategies, which are not fully
implemented, could be disruptive
to level playing field
7.2%
12.9%
18.4%
1Q12
2Q12
3Q12


13
Diners Club International:
Adding issuing and acquiring relationships
India
Russia
China
Second largest
private bank and
largest credit card
issuer in India
Largest credit card
issuer in Russia
Will issue Diners
Club and Discover
branded cards
Largest credit card
issuer in China, one
of the largest banks
globally


14
Alternative Payments:
Active in alternative payments and demonstrating flexibility
Mobile Wallet Universe
Discover
Embedded Payment
Credential
(NFC) 
External Payment
Credential
(Cloud + Proxy) 
PayPal
Square
Serve
PayPass
LevelUp
V.Me
Starbucks
Amazon
Google Wallet
Apple
MCX
ISIS
Sprint
Focus on an open wallet strategy
Gain volume beyond existing
issuing relationships
Mobile functionality includes:
Real-time alerts
Marketing at point-of-sale
NFC acceptance parity in U.S.
with terminals at over 200k
merchant locations


15
Alternative Payments:
Working to support PayPal at the point-of-sale
Operates system with its own
brand, pricing and operating rules
Will be the issuer of PayPal card
PayPal
Enables in-store PayPal
transactions
Provides PayPal access to more
than 7 million merchants
Increases network transaction
volume
Discover


16
Shareholder Value:
Enhancing returns through effective capital deployment
Returned ~$975 million in capital to shareholders in Q1 through Q3
with share repurchases and dividends
Repurchased 4%+ of outstanding shares in last two quarters
Broadened
capital
structure
by
issuing
$575
million
of
preferred
stock
Revisit common dividend at least annually
Generated returns above 15% ROE target during FY2012 with
excess capital


17
Growing receivables, sales and profits in card
Diversifying our product suite
Increasing acceptance globally and exploiting opportunities in payments
Deploying excess capital to drive shareholder value
Summary:
Executing on direct banking and payments strategy


Appendix


19
Reconciliation of GAAP to Non-GAAP data
(unaudited, $ in billions)
11/30/11
8/31/12
GAAP Recorded Balance Purchased (Private) Credit Impaired Student Loans (ending loans)
$5.3
$4.9
Adjustment for Purchase Accounting Discount
0.4
0.4
Contractual Value Purchased (Private) Credit Impaired Student Loans (ending loans)
(1)
$5.7
$5.2
GAAP Private Student Loans (ending loans)
2.1
2.8
Contractual Value Private Student Loans (ending loans)
(1)
$7.8
$8.0
Twelve Months Ended
(unaudited, $ in billions)
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
Twelve Months Ended
(unaudited, $ in millions)
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
Twelve Months Ended
(unaudited, $ in millions, calendar year data)
9/30/12
Card Pretax Income
$3,396
Non-Card Pretax Income
394
GAAP Direct Banking Pretax Income
$3,790
Card Pretax Income
$3,396
Card Reserve Changes
649
Card Pretax Income (Excluding Reserve Changes)
$2,747
GAAP Average Card Receivables
$46,557
Card Pretax Return on Assets (Excluding Reserve Changes)
(3)
5.90%
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