Attached files
| file | filename |
|---|---|
| EX-99.2 - EXHIBIT 99.2 - Discover Financial Services | dfs2017630ex992.htm |
| EX-99.1 - EXHIBIT 99.1 - Discover Financial Services | dfs-earningsreleasex2q17ex.htm |
| 8-K - 8-K - Discover Financial Services | a2q178k.htm |
2Q17 Financial Results
July 26, 2017
1
©2017 DISCOVER FINANCIAL SERVICES
The following slides are part of a presentation by Discover Financial Services (the "Company") in connection with
reporting quarterly financial results and are intended to be viewed as part of that presentation. No representation is made
that the information in these slides is complete. For additional financial, statistical, and business related information, as
well as information regarding business and segment trends, see the earnings release and financial supplement included
as exhibits to the Company’s Current Report on Form 8-K filed today and available on the Company’s website
(www.discover.com) and the SEC’s website (www.sec.gov).
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
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, 2016, and under
“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, 2017, which are 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.
Notice
2
Vision
Goal
Focus areas and strategic objectives
Invest for the future
• Build awareness and consideration
• Enhance capabilities and operating model
Achieve profitable, disciplined growth
• Excel at serving our customers; simple, secure
experience with deep relationships
• Offer differentiated products
• Leverage payments network
Be the leading direct bank and payments partner
Create long-term shareholder value
Vision, Strategic Objectives and Goal
Manage risk prudently
3
• Delivered net income of $546MM, diluted EPS of $1.40 and 9% revenue growth YOY
• Achieved 8% total loan growth YOY with good momentum across all primary lending products
(credit cards, private student and personal loans)
• Held the line on operating expenses, despite strong loan growth
• Remained disciplined on risk-adjusted returns with 19% return on equity
• Managed rewards rate lower (-1 bp YOY and -5 bps QOQ)
• Increased Payment Services volume rate of growth (up 12% YOY)
• Announced 2017-2018 capital plan, raising quarterly common dividend $0.05 to $0.35 per
share and planning to purchase $2.23Bn of common shares over four quarters
2Q17 Highlights
4
Note(s)
1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is 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 helps investors understand the effect of provision for loan losses on reported results
and provides an alternate presentation of the Company’s performance; see appendix for a reconciliation
Highlights
• Diluted EPS of $1.40, down 5%
YOY (2Q16 included a non-
recurring tax benefit of $0.11 per
share)
• Revenue net of interest expense of
$2.4Bn, up 9% YOY, driven by
higher net interest income
• Provision for loan losses increased
$228MM YOY (55%) on higher net
charge-offs and a reserve build
• Expenses rose just 1%, primarily
from higher compensation and
benefits
2Q17 Summary Financial Results
B / (W)
($MM, except per share data) 2Q17 2Q16 $ Δ % Δ
Revenue Net of Interest Expense $2,419 $2,216 $203 9%
Net Principal Charge-off 520 384 (136) (35%)
Reserve Changes build/(release) 120 28 (92) (329%)
Provision for Loan Losses 640 412 (228) (55%)
Operating Expense 912 906 (6) (1%)
Direct Banking 831 868 (37) (4%)
Payment Services 36 30 6 20%
Total Pre-Tax Income 867 898 (31) (3%)
Income Tax Expense 321 282 (39) (14%)
Net Income $546 $616 ($70) (11%)
ROE 19% 22%
Diluted EPS $1.40 $1.47 ($0.07) (5%)
Pre-Tax, Pre-Provision Income (1) $1,507 $1,310 $197 15%
5
Payment Services
2Q16 2Q17
$71.9
$57.2
$8.7
$5.7
$78.0
$61.8
$8.9 $7.0
+8% +8% +2% +22%
Note(s)
1. Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
Total Network Volume up 9% YOY
Ending Loans ($Bn) Volume ($Bn)
2Q16 2Q17
$31.8 $33.9
$7.2
$3.7
$33.3
$38.8
$7.8
$3.5
Total Card Student Personal
+5% +15% +8% (7%)
Proprietary PULSE
Network
PartnersDiners
(1)
2Q17 Loan and Volume Growth
6
Note(s)
1. Rewards cost divided by Discover card sales volume
Highlights
• Net interest income of $1.9Bn, up
11% YOY on higher loan growth
and modest NIM expansion
• Net discount and interchange
revenue increased $13MM (5%) on
increased card sales
• Rewards rate decreased 1 bp YOY,
driven by lower promotional
rewards
2Q17 Revenue Detail
B / (W)
($MM) 2Q17 2Q16 $ Δ % Δ
Interest Income $2,338 $2,090 $248 12%
Interest Expense 400 339 (61) (18%)
Net Interest Income 1,938 1,751 187 11%
Discount/Interchange Revenue 666 636 30 5%
Rewards Cost 388 371 (17) (5%)
Net Discount/Interchange Revenue 278 265 13 5%
Protection Products Revenue 56 59 (3) (5%)
Loan Fee Income 83 79 4 5%
Transaction Processing Revenue 42 39 3 8%
Other Income 22 23 (1) (4%)
Total Non-Interest Income 481 465 16 3%
Revenue Net of Interest Expense $2,419 $2,216 $203 9%
Direct Banking $2,346 $2,147 $199 9%
Payment Services 73 69 4 6%
Revenue Net of Interest Expense $2,419 $2,216 $203 9%
Change
($MM) 2Q17 2Q16 QOQ YOY
Discover Card Sales Volume $32,172 $30,702 10% 5 %
Rewards Rate (1) 1.20% 1.21% -5 bps -1 bp
7
Highlights
• Net interest margin on receivables
increased 17bps YOY on higher
card yield and portfolio mix, partially
offset by higher charge-offs and
funding costs
• Credit card yield increased 24bps
YOY as the prime rate increased,
partially offset by higher interest
charge-offs
• Average consumer deposits grew
11% YOY and composed 47% of
total average funding
• Funding costs on interest-bearing
liabilities increased 16bps YOY,
driven by higher market rates and
funding mix
2Q17 Net Interest Margin
2Q17 2Q16
($MM)
Average
Balance Rate
Average
Balance Rate
Credit Card $60,700 12.66% $56,124 12.42%
Private Student 9,020 7.45% 8,816 7.13%
Personal 6,820 12.22% 5,608 12.25%
Other 314 5.59% 262 5.04%
Total Loans 76,854 11.98% 70,810 11.72%
Other Interest-Earnings Assets 15,175 1.11% 14,562 0.71%
Total Interest-Earnings Assets $92,029 10.19% $85,372 9.84%
Direct to Consumer and Affinity $36,956 1.29% $33,215 1.22%
Brokered Deposits and Other 15,600 2.07% 14,740 1.78%
Interest Bearing Deposits 52,556 1.52% 47,955 1.39%
Borrowings 26,122 3.09% 24,621 2.82%
Total Interest-Bearing Liabilities $78,678 2.04% $72,576 1.88%
Change
(%) 2Q17 QOQ YOY
Total Interest Yield 11.98% 4bps 26bps
NIM on Receivables 10.11% 4bps 17bps
NIM on Interest-Earning Assets 8.44% 14bps 19bps
8
Note(s)
1. Defined as reported total operating expense divided by revenue net of interest expense
2. 2Q16 operating efficiency ratio adjusted for $12 million in look back related anti-money laundering remediation expenses. Management believes adjusted operating efficiency,
which is a non-GAAP measure, helps investors understand the effect of activities that are not expected to continue and provides investors with a useful metric to evaluate the
company’s ongoing operating performance; see appendix for a reconciliation
Highlights
• Employee compensation and
benefits up 8% YOY, primarily on
higher staffing levels driven by
increased compliance headcount
• Information processing down 13%
YOY, primarily from infrastructure
efficiencies
• Operating efficiency improved 320
bps on expense discipline and
completion of certain AML projects
2Q17 Operating Expense Detail
B / (W)
($MM) 2Q17 2Q16 $ Δ % Δ
Employee Compensation and Benefits $367 $340 ($27) (8%)
Marketing and Business Development 192 198 6 3%
Information Processing & Communications 77 89 12 13%
Professional Fees 156 150 (6) (4%)
Premises and Equipment 23 23 0 —%
Other Expense 97 106 9 8%
Total Operating Expense $912 $906 ($6) (1%)
Direct Banking 876 868 ($8) (1%)
Payment Services 36 38 2 5%
Total Operating Expense $912 $906 ($6) (1%)
Operating Efficiency(1) 37.7% 40.9% 320 bps
Adjusted Operating Efficiency(2) 37.7% 40.3% 260 bps
9
Total Company Loans Credit Card Loans
Private Student Loans Personal Loans
NCO rate (%) 30+ day DQ rate ex-PCI (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
2.14 2.05 1.85 2.02
2.11 2.18 2.02
2.31
2.60 2.71
1.57 1.49 1.60 1.67 1.64 1.60
1.79 1.97 1.97 1.93
NCO rate (%) 30+ day DQ rate (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
2.40 2.28
2.04 2.18
2.34 2.39 2.17
2.47
2.84 2.94
1.64 1.55 1.65 1.72 1.68 1.63
1.87 2.04 2.06 2.00
NCO rate (%) 30+ day DQ rate (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
2.22 2.10 1.99
2.28 2.45 2.38
2.63 2.70
3.16 3.18
0.76 0.71 0.80 0.89 0.97
1.02 0.98 1.12 1.12 1.14
NCO rate (%) 30+ day DQ rate ex-PCI (%)
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
0.61 0.61 0.57
0.82
0.56 0.74 0.70
1.00
0.60
0.85
1.66 1.78
1.88 1.91 1.92 1.88 1.87
2.22 2.04 2.12
Credit Performance Trends
Revised 2017 NCO guidance: 2.7 - 2.8%
10
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
102 95 93 95 94 99 99
104
108
14.5 14.4
13.9
14.3 14.3
13.9
13.2
13.4
13.0
Capital Trends
Note(s)
1. Common Equity Tier 1 Capital Ratio (Basel III Transition)
2. Payout Ratio is displayed on a trailing twelve month basis. This represents the trailing twelve months’ Capital Return to Common Stockholders divided by the trailing twelve
months’ Net Income Allocated to Common Stockholders
Common Equity Tier 1 Capital Ratio(1) (%) Payout Ratio(2) (%)
11
Profitability
• Net income of $546MM and
diluted EPS of $1.40
• Revenue growth of 9% on
higher net interest income
• NIM of 10.11%, up 17bps
YOY
• Return on equity remains
strong at 19%
• Efficiency ratio improved
3pp YOY to 38%
2Q17 Financial Summary
12
• Total loans grew 8%
($6.1Bn) YOY with strong
contributions from all
primary lending products
• Credit card loans grew 8%
($4.6Bn) YOY as sales
volume increased 5%
• Average consumer
deposits grew 11%
($3.7Bn) YOY as deposit
rates increased slightly
• Total NCO rate of 2.71%,
up 53 bps YOY
• Driven by supply-
induced credit
normalization and loan
seasoning
• Revised 2017 guidance
to 2.7 - 2.8%
• Capital plan announced for
3Q17 - 2Q18:
• Raised quarterly
common dividend $0.05
to $0.35/share
• Planned gross share
repurchases of $2.23Bn
Balance Sheet Credit and Capital
Appendix
13
Note(s)
1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is 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 helps investors understand the effect of provision for loan losses on reported results
and provides an alternate presentation of the Company's performance
2. Adjusted operating efficiency, which is a non-GAAP measure, helps investors understand the effect of activities that are not expected to continue and provides investors with a
useful metric to evaluate the company’s ongoing operating performance
Reconciliation of GAAP to Non-GAAP Data
(unaudited, $MM) 2Q17 2Q16
Provision for loan losses $640 $412
Income before income taxes 867 898
Pre-tax, pre-provision income(1) $1,507 $1,310
Revenue net of interest expense $2,419 $2,216
Total operating expense 912 906
Excluding anti-money laundering and related compliance program expenses — 12
Adjusted operating expense $912 $894
Adjusted Operating Efficiency(2) 37.7% 40.3%
14
