Attached files
| file | filename |
|---|---|
| EX-99.2 - EXHIBIT 99.2 - Discover Financial Services | dfs2017930ex992.htm |
| EX-99.1 - EXHIBIT 99.1 - Discover Financial Services | dfs-earningsreleasex3q17ex.htm |
| 8-K - 8-K - Discover Financial Services | a3q178k.htm |
3Q17 Financial Results
October 24, 2017
©2017 DISCOVER FINANCIAL SERVICES
Exhibit 99.3
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 quarters ended June 30, 2017, and 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
• Delivered net income of $602MM, diluted EPS of $1.59 and 10% revenue growth YOY
• Achieved 9% total loan growth YOY with solid gains across all primary lending products (credit
cards, private student and personal loans)
• Net interest margin up 29 bps YOY to 10.28%
• Continued to drive positive operating leverage
• Increased Payment Services volume rate of growth (up 16% YOY)
• Remained disciplined on risk-adjusted returns with 22% return on equity
• Returned $667MM of capital through dividends and share repurchases
3Q17 Highlights
3
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 $1.59, up 2% YOY
• Revenue net of interest expense of
$2.5Bn, up 10% YOY, driven by
higher net interest income
• Provision for loan losses increased
$229MM YOY (51%) on higher net
charge-offs and a larger reserve
build
• Expenses rose 6%, primarily from
higher compensation and
professional fees
• Income tax expense of $301MM
was lower by 7% YOY. Both 3Q16
and 3Q17 include a tax benefit of
$28MM
3Q17 Summary Financial Results
B / (W)
($MM, except per share data) 3Q17 3Q16 $ Δ % Δ
Revenue Net of Interest Expense $2,525 $2,301 $224 10%
Net Principal Charge-off 527 370 (157) (42%)
Reserve Change build/(release) 147 75 (72) (96%)
Provision for Loan Losses 674 445 (229) (51%)
Operating Expense 948 895 (53) (6%)
Direct Banking 867 931 (64) (7%)
Payment Services 36 30 6 20%
Total Pre-Tax Income 903 961 (58) (6%)
Income Tax Expense 301 322 21 7%
Net Income $602 $639 ($37) (6%)
ROE 22% 23%
Diluted EPS $1.59 $1.56 $0.03 2%
Pre-Tax, Pre-Provision Income (1) $1,577 $1,406 $171 12%
4
Payment Services
3Q16 3Q17
$73.6
$58.0
$9.0 $6.3
$80.4
$63.5
$9.2 $7.4
+9% +9% +2% +18%
Note(s)
1. Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
Total Network Volume up 12% YOY
Ending Loans ($Bn) Volume ($Bn)
3Q16 3Q17
$31.8 $33.9
$7.3
$3.3
$33.6
$39.8
$8.0
$3.8
Total Card Student Personal
+6% +17% +9% 15%
Proprietary PULSE
Network
PartnersDiners
(1)
3Q17 Loan and Volume Growth
5
Note(s)
1. Rewards cost divided by Discover card sales volume
Highlights
• Receivables growth and margin
expansion drove 12% YOY
increase in net interest income
• Net discount and interchange
revenue decreased $5MM (2%)
because of higher rewards expense
• Enhanced customer engagement
with promotional rewards drove a
10 bps increase in rewards rate
YOY
3Q17 Revenue Detail
B / (W)
($MM) 3Q17 3Q16 $ Δ % Δ
Interest Income $2,476 $2,184 $292 13%
Interest Expense 426 359 (67) (19%)
Net Interest Income 2,050 1,825 225 12%
Discount/Interchange Revenue 675 631 44 7%
Rewards Cost 417 368 (49) (13%)
Net Discount/Interchange Revenue 258 263 (5) (2%)
Protection Products Revenue 55 60 (5) (8%)
Loan Fee Income 95 91 4 4%
Transaction Processing Revenue 43 40 3 8%
Other Income 24 22 2 9%
Total Non-Interest Income 475 476 (1) —%
Revenue Net of Interest Expense $2,525 $2,301 $224 10%
Direct Banking $2,451 $2,233 $218 10%
Payment Services 74 68 6 9%
Revenue Net of Interest Expense $2,525 $2,301 $224 10%
Change
($MM) 3Q17 3Q16 QOQ YOY
Discover Card Sales Volume $32,161 $30,683 —% 5%
Rewards Rate (1) 1.30% 1.20% 10 bps 10 bps
6
Highlights
• Net interest margin on receivables
increased 29 bps YOY on higher
loan yields, partially offset by higher
funding costs
• Credit card yield increased 30 bps
YOY as the prime rate increased,
partially offset by higher interest
charge-offs and portfolio mix
• Average consumer deposits grew
10% YOY and composed 47% of
total average funding
• Funding costs on interest-bearing
liabilities increased 16 bps YOY,
driven by higher market rates and
funding mix
3Q17 Net Interest Margin
3Q17 3Q16
($MM)
Average
Balance Rate
Average
Balance Rate
Credit Card $62,647 12.83% $57,561 12.53%
Private Student 8,986 7.56% 8,795 7.13%
Personal 7,208 12.33% 6,036 12.23%
Other 348 5.56% 276 4.96%
Total Loans 79,189 12.15% 72,668 11.82%
Other Interest-Earnings Assets 15,395 1.30% 14,382 0.68%
Total Interest-Earnings Assets $94,584 10.39% $87,050 9.98%
Direct to Consumer and Affinity $37,900 1.37% $34,488 1.26%
Brokered Deposits and Other 16,192 2.12% 14,267 1.90%
Interest Bearing Deposits 54,092 1.59% 48,755 1.45%
Borrowings 26,928 3.07% 25,484 2.82%
Total Interest-Bearing Liabilities $81,020 2.08% $74,239 1.92%
Change
(%) 3Q17 QOQ YOY
Total Interest Yield 12.15% 17bps 33bps
NIM on Receivables 10.28% 17bps 29bps
NIM on Interest-Earning Assets 8.60% 16bps 26bps
7
Note(s)
1. Defined as reported total operating expense divided by revenue net of interest expense
Highlights
• Employee compensation and
benefits up 8% YOY, primarily on
higher staffing levels, as well as
higher average salaries
• Professional fees up 14% YOY,
primarily due to investments in
technology and analytic
capabilities
• Operating efficiency improved 140
bps on strong revenue growth
coupled with disciplined expense
growth
3Q17 Operating Expense Detail
B / (W)
($MM) 3Q17 3Q16 $ Δ % Δ
Employee Compensation and Benefits $371 $342 ($29) (8%)
Marketing and Business Development 203 195 (8) (4%)
Information Processing & Communications 78 81 3 4%
Professional Fees 163 143 (20) (14%)
Premises and Equipment 25 25 — —%
Other Expense 108 109 1 1%
Total Operating Expense $948 $895 ($53) (6%)
Direct Banking 909 857 ($52) (6%)
Payment Services 39 38 (1) (3%)
Total Operating Expense $948 $895 ($53) (6%)
Operating Efficiency(1) 37.5% 38.9% 140 bps
8
Total Company Loans Credit Card Loans
Private Student Loans Personal Loans
NCO rate (%) 30+ day DQ rate ex-PCI (%)
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
2.05 1.85 2.02
2.11 2.18 2.02
2.31
2.60 2.71 2.63
1.49 1.60 1.67 1.64 1.60
1.79 1.97 1.97 1.93
2.05
NCO rate (%) 30+ day DQ rate (%)
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
2.28
2.04 2.18
2.34 2.39 2.17
2.47
2.84 2.94 2.80
1.55 1.65 1.72 1.68 1.63
1.87 2.04 2.06 2.00
2.14
NCO rate (%) 30+ day DQ rate (%)
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
2.10 1.99
2.28 2.45 2.38
2.63 2.70
3.16 3.18 3.19
0.71 0.80 0.89 0.97
1.02 0.98 1.12 1.12 1.14
1.27
NCO rate (%) 30+ day DQ rate ex-PCI (%)
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
0.61 0.57
0.82
0.56 0.74 0.70
1.00
0.60
0.85
1.14
1.78 1.88 1.91 1.92 1.88 1.87
2.22 2.04 2.12 2.14
Credit Performance Trends
9
3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
95 93 95 94 99 99
104 108 109
14.4
13.9
14.3 14.3
13.9
13.2
13.4
13.0
12.5
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 (CET1) Capital Ratio(1) (%) Payout Ratio(2) (%)
10
Balance Sheet
• Total loans grew 9%
($6.9Bn) YOY with strong
contributions from all
primary lending products
• Credit card loans grew 9%
($5.5Bn) YOY as sales
volume increased 5%
• Average consumer
deposits grew 10%
($3.4Bn) YOY, while
deposit rates increased
slightly
3Q17 Financial Summary
11
• Total NCO rate of 2.63%,
up 61 bps YOY
• Driven by supply-
induced credit
normalization and loan
seasoning
• Capital plan execution
• Repurchased 9.2MM
shares of common
stock for $555MM
• CET1 capital ratio(1) of
12.5%, down 140 bps
YOY
• Net income of $602MM
and diluted EPS of $1.59
• Revenue growth of 10%
on higher net interest
income
• NIM of 10.28%, up 29 bps
YOY
• Return on equity remains
strong at 22%
• Efficiency ratio stable
QOQ at 38%
Credit and Capital Profitability
Note(s)
1. Basel III Transition
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
Appendix
Reconciliation of GAAP to Non-GAAP Data
(unaudited, $MM) 3Q17 3Q16
Provision for loan losses $674 $445
Income before income taxes 903 961
Pre-tax, pre-provision income(1) $1,577 $1,406
12
