Financial Community Briefing Presentation

EX-99.1 2 dex991.htm FINANCIAL COMMUNITY BRIEFING PRESENTATION Financial Community Briefing Presentation

March 20, 2008

Financial Community Briefing

Exhibit 99.1

Craig Streem

VP, Investor Relations

Welcome

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 presentation has been prepared solely for informational purposes, is neither an

offer to sell nor the solicitation of an offer to buy any security or instrument.

The information provided herein may include certain non-GAAP financial measures. The reconciliations of

such

measures

the

comparable

GAAP

figures

are

included

the

Company’s

Form

10-K

for

the

year

ended

November

30,

2007

and

the

Company’s

Quarter

Earnings

Release

furnished

Form

8-K

dated

March 19, 2008, each of which is on file with the SEC.

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

the

Company,

please

see

"Special

Note

Regarding

Forward-Looking

Statements,"

"Risk

Factors,"

"Business

–

Competition,"

"Business

–

Regulatory

Matters"

and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the

Company’s Information Statement that is included as part of the Company’s Form 10-K for the year ended

November 30, 2007, which is on file with the SEC.

The historical financial information prior to the Company’s spin-off from Morgan Stanley included in the

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 such periods presented.

David Nelms

CEO

Overview

•

PULSE and Discover Network

third-party payments business

–

4,500+ financial institutions

–

$96.8Bn network volume

(2)

•

Discover cards issued on Discover

Network

–

largest issuer

–

$47.5Bn receivables

(1)

–

$105.9Bn total volume

(2)

–

largest U.S. merchant network

Third-Party

Payments

U.S. Card

Business and Objectives

Note(s):

(1)

Receivables reported on a managed basis as of February 29, 2008

(2)

Volumes reported for the trailing four quarters ended 1Q08

•

2.9% pretax ROMR

•

4%-8% loan growth

Objectives

•

Maintain strong credit quality

•

18%+ third-party volume growth

U.S. Card

•

2.9% pretax ROMR

•

Maintain credit quality

•

Grow loans 4 -

Third-Party Payments

•

Grow credit and debit volume 18%+

International

•

Close Goldfish sale in 2Q

Performance Against Objectives

Objectives

1Q Results

(1)

24% volume growth

3.1% pretax ROMR

4.37% charge-off rate

3.93% 30+ day delinquency

2% growth (43% reduction in balance

transfers, 5% growth in sales)

Note(s):

(1)

Managed basis

On track

Delinquency Trends (U.S. Card)

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

1Q08

Managed 30+ Day Delinquency Rate

$60

$70

$86

$94

$146

$79

$163

2004

2005

2006

2007

Discover Card

Discover Network Third Parties

PULSE

$186

Network Volume

DOJ

(Bn)

U.S. Card

Credit

Payments

Earnings, Capital and Funding

Q&A

Today’s Agenda

Jim Panzarino

CHIEF CREDIT RISK OFFICER

Roger Hochschild

PRESIDENT & CHIEF OPERATING OFFICER

Roy Guthrie

CHIEF FINANCIAL OFFICER

Harit Talwar

EXECUTIVE VICE PRESIDENT, DISCOVER NETWORK

Roger Hochschild

President & COO

U.S. Card

Discover Vision & Mission

To be the most

rewarding relationship

consumers and businesses

have with a

financial services company

To help people

spend smarter,

manage debt better

and save more

so they achieve a

brighter financial future

Vision

Mission

U.S. Card Growth Foundation

•

Distinctive brand

•

Leading rewards

•

Proprietary network

•

World-class customer experience

•

Strong risk management

15%

23%

24%

28%

58%

60%

AMEX

Discover

Capital

One

Chase

Citi

BofA

Strong Brand

Unaided Issuer Brand Awareness

Source:

GfK Arbor, 4Q07 data

2008 Brand Keys

Award Winners

Citi

AMEX

JPM

Chase

Discover

BofA

Cap One

Discover Continues to Lead Cash Rewards

Household Ownership of

Cash Rewards Cards

(2)

Source:

2007 TNS Consumer Card Strategies Research Program

45%

13%

15%

14%

Note(s):

(1)

Comperemedia

1/9/08;

per

Discover

fiscal

quarters

(2)

Percentages add to >100% due to household use of multiple brands

15%

16%

22%

18%

16%

18%

16%

15%

17%

20%

25%

27%

26%

24%

47%

41%

35%

41%

43%

4Q06

1Q07

2Q07

3Q07

4Q07

Discover

Chase

HSBC

Other

Cash Reward Mail Share

(1)

Key Features

•

5% Cashback Bonus

Program with 15+

rotating categories

•

Up to 1% unlimited

Cashback Bonus

New Products Expanding Cash Rewards

Motiva

Open Road

Miles

Business

Key Features

•

Full month’s interest

back for 6 consecutive

timely payments, twice

a year

•

Up to 1% unlimited

Cashback Bonus

Key Features

•

5% Cashback Bonus

on gas and auto

maintenance

•

Up to 1% unlimited

Cashback Bonus

Key Features

•

Double Miles on

travel and restaurant

•

1 mile per dollar,

unlimited

•

Travel with no

restrictions

Key Features

•

5% Cashback Bonus

on office supplies,

2% on gas

•

Up to 1% unlimited

Cashback Bonus

•

Fee-free Purchase

Checks with rewards

Target

•

Confident credit users

who maximize rewards

Target

•

Credit users who feel

traditional rewards

programs don’t address

their needs

Target

•

Value-conscious

consumers open to

credit as a means of

savings

Target

•

Credit users frustrated

with restrictive and

complex travel rewards

programs

Target

•

Small businesses

needing cash flow

flexibility and superior

service

•

Rated best in

category “cash-back”

card 6/07

•

“A credit card it pays to

pay”

5/07

•

Rated one of the “top

gasoline cards”

7/07

•

“Versatile travelers: If

you’re frequently

traveling by plane, train

and automobile, rejoice”

5/07

Leverage Network Merchant Relationships

ShopDiscover Partners

100+ Cashback Bonus Partners

Leverage Merchant Relationships

Discover Extras

Mall Programs

Large Merchants

Small Merchants

Impact of Increased Acceptance

Acceptance Benefit

•

Increase share of wallet

•

Higher cardmember usage and

balance

•

Improve new account response rates

•

Appeal to new customer segments

Merchant Acceptance

% of Visa/MasterCard Merchants

~85%

(1)

party

acquirer

opportunity

~100%

Note(s):

(1)

Acceptance

estimate

based

upon

Roper

survey

and

data

provided

third

party

acquirers

KNOWLEDGEXPO

2008

Over 120 Million Branded Phone Conversations

•

Outstanding service is rooted in our

people and culture

•

“Discover”

service delivery is

enabled by:

–

Integrated communications

–

Targeted training and

coaching

–

Effective performance metrics

–

Flexible infrastructure and

online guidance

World-Class Customer Service

Customer Service Agent Tenure

•

46% of agents are tenured at

3 yrs

•

11% of agents are tenured

10 yrs

42%

56%

World Class Calls

(2)

66%

82%

Overall Customer

Satisfaction

68%

87%

82%

95%

First Call Resolution

Calls Resolved

Avg Call

Center

Discover

Measure

First Call Resolution

(1)

Source:

(1)

2007 Service Quality Benchmarking Report, Service Quality Measurement Group

Note(s):

(2)

World

Class

Calls:

customers

who

are

overall

very

satisfied

(top

box

response)

with

their

call

center

experience,

are

very

satisfied

with

the

top five service quality metrics (caring, helping, knowledge, decision and resolution) and their call was resolved

0-6

months

18%

1-3 years

22%

3-5 years

10%

5-10 years

25%

10+ years

11%

7-12

months

14%

Over 400 Million Internet Interactions

Protection Products

2007 J.D. Power

Card Satisfaction Index

Recognized Leader in Customer Experience

571

607

617

636

638

646

651

652

728

735

AMEX

DFS

Citi

Chase

U.S.

Bank

WaMu Wells

Fargo

Cap

One

BofA HSBC

Rewards

Discover

Ranking

Satisfaction

Categories

Problem Resolution

Fees/Rates

Billing/Pmt Proc

Benefits/Features

Source:

2007 Credit Card Satisfaction Study-J.D. Power

44%

58%

67%

72%

77%

Discover

Citi

AMEX

BofA

Capital

One

Chase

Customer Experience Drives Cardmember Loyalty

Note(s):

(1)

Excluding Discover Financial Services and American Express

(2)

Latest Master Trust balances as of 3/18/08; based on receivables

(3)

Weighted average tenure of the receivables that are assets of the Chase Issuance Trust

> 5 Years

Cardmember Attrition

Portfolio Tenure

(2)

(3)

4.5%

9.1%

Discover

U.S. Industry Average

Source:

Cardweb’s January 2007 Monthly Survey

(1)

Jim Panzarino

SVP, Chief Credit Risk Officer

Credit

Risk Organization Capabilities

•

Prudent risk management orientation

•

Strong analytic talent

•

State-of-the-art statistical tools and systems

Acquisition Process

•

Systemic decisions

supplemented by manual

underwriting

•

Apply credit criteria including

assessment of stability,

ability and willingness to pay

•

Use internally derived credit

models incorporating

application and bureau data

•

Assign credit line using

macroeconomic information

•

Fully integrated acquisition

decision making and controls

New Credit Card Account

Average FICO Score at Booking

734

737

738

734

2004

2005

2006

2007

Portfolio Management

•

Profit-based decisioning

•

Tradeline credit bureau data

•

Customer level line increase/decrease strategies

•

Internally developed models and strategies

Portfolio Positioning in Current Environment

DFS Homeownership Distribution

(2)

DFS Mortgage Distribution

(2)

Demographic

Profile

(1)

73%

48%

42%

65%

36%

30%

Married

College Graduate

Income > $75K

Discover

Other Issuers

Mortgages

54%

Own

Outright

21%

Rent,

Other

25%

Fixed

Prime

73%

Fixed Non-

Prime

ARM Non-

Prime

ARM Prime

15%

Source:

(1)

TNS

Financial

Services’

2007

Consumer

Card

Study

(2)

Based on Credit Bureau and internal data

Effective Collections/Recovery Organization

Proactively work with customers

•

Focusing on early identification, support and rehabilitation

•

Using risk profiles and analytics to segment our customer

population and offer targeted repayment programs

•

Utilizing our own 2,000+ U.S. based employees

•

Not selling distressed assets

Proactive Portfolio Management

Prior to the subprime difficulties

•

Identified areas of concern in our portfolio using tradeline data

•

Refined geographic risk rules for marketing activities and

credit line actions

•

Tightened underwriting criteria to applicants with

overextended mortgages

Once problems appeared

•

Identified and reduced marketing into rising risk areas

•

Suppressed automated line increases in riskier states

•

Closed potentially high-risk inactive accounts

44%

58%

67%

72%

77%

Discover

Citi

AMEX

BofA

Capital

One

Chase

10%

12%

15%

14%

17%

16%

18%

22%

25%

21%

Discover

Chase

Capital

One

Citibank

BofA

AMEX

California

Florida

Portfolio Positioning Versus Peers

Source:

Latest Master Trust balances as of 3/18/08; based on receivables

Note(s):

(1)

Weighted

average

tenure

the

receivables

that

are

assets

the

Chase

Issuance

Trust

(2)

represented

Chase’s

CHAIT

Master

Trust

(1)

(2)

Distribution of Receivables

Portfolio Tenure

> 5 Years

3.0%

3.5%

4.0%

4.5%

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

Jan-08

Discover

Industry

Master

Trust

30+

Day

Dollar

Delinquency

Rate

(1)

-60%

-40%

-20%

20%

40%

60%

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

Jan-08

Discover

Industry

Master

Trust

YOY

Variance

Net

Loss

Rate

(1)

Source:

(1)

Industry includes Bank of America, Capital One, Chase and Citigroup

Credit Trends Versus Peers

Harit Talwar

EVP, Discover Network

Payments

Discover Network

Branded, scaleable, signature network

Broad product range with unique

functionality

‘Closed loop’

network benefits

Reciprocal agreements with

ChinaUnion Pay and JCB

largest PIN / POS network

$101Bn

20+

$91Bn

4,500+

Overview Volume

(1)

Issuers

Note(s):

(1)

Trailing four quarters ending 1Q08

Issue PULSE

Issue Discover

Network

Acquire

Merchants

Bank of America

JPMorgan Chase

Citi

Capital One

HSBC

N/A

Washington Mutual

N/A

Wells Fargo

USAA Savings

N/A

US Bank

GE Money

Relationships with Top 10 Banks

Note(s):

(1)

In partnership with First Data

(1)

•

8 of 10 issue or acquire

•

5 of 10 issue debit or credit

PULSE Strategy

•

Continue to grow customer base and market share

–

Competitive pricing

–

Exclusive relationships

•

Drive revenue and earnings by leveraging highly scalable infrastructure

and controlling expenses

•

Build on success of Discover Network acceptance initiative to support

marketing of Discover Debit

•

Technology and product enhancements

–

Debit Protect

–

Reporting Analytics

PULSE 2007 Highlights

2007 Market Share

Transaction

Volume Growth

16%

24%

2006

2007

Accel /

Exchange

Other

PULSE/

Discover

12%

Interlink /

Visa

41%

Star / FDC

29%

NYCE /

Metavante

10%

Source:

ATM & Debit News, EFT Data Book (2008)

Acceptance Model

Timeline

2005

2009

Internal

Systems/Operations

Sign 3rd

Party

Acquirers

2006

2007

2008

Implementation

•

Implementation

track;

2008

new

merchant

boardings

expected

exceed

targets

•

Acceptance parity tracking to internal milestones

•

Signed

acquirers

who

service

approximately

million

merchant

relationships

•

Program

and

learnings

have

validated

model

and

enhanced

multiple

processes

•

Support

•

Pre-DOJ

Small Merchants

Sales

Boarding

Large Merchants

Acquirer

New

Program

Acquirer

Acceptance –

Execution Progress

1Q07

1Q08

Early results encouraging:

•

100% inclusion in fully integrated solution

•

We estimate 34% of existing bank card

accepting merchants who did not accept

Discover Network have been boarded

New Outlets

Progress by Partner

132%

increase

Status

Implementation underway

Interim

Program

Live

Integrated

Front end

Activating

Discover for

Bank Card

Portfolio

Chase Paymentech

Bank of America

First Data

NOVA Information Systems

Fifth Third

Wells Fargo

Global Payments

Heartland

First National Merchant Solutions

RBS Lynk

•

Multi-audience

•

Merchants

•

ISOs

•

Consumers

•

Multi-Channel

•

Direct mail, telemarketing,

inserts

•

Merchant and ISO visits

and forum

•

Sweepstakes

•

Advertising

•

Consumer communication

message development underway

Integrated Marketplace Communication

Third-Party Issuing

•

Strong brand choice

•

Competitive interchange and assessments

•

Robust product suite and acceptance

•

Flexibility and ease of implementation

•

Customized usage programs leveraging

merchant relationships

Leveraging Discover Network Relationships

Value Proposition

Programs and Sample Issuers

•

Consumer Credit

•

Business Credit

•

Payroll

•

Private label

•

Prepaid / Gift

Third-Party Volume (Bn)

$5.5

2005

2006

2007

Third-Party Payments Economics

(MM)

2005

2006

2007

YOY %

Volume (Bn)

$61.2

$73.2

$91.7

25%

Revenue

112

121

Expenses

(93)

(84)

Pretax Income

$29

$37

28%

Profit Margin

26%

31%

Roy Guthrie

EVP, Chief Financial Officer

Earnings, Capital

and Funding

1Q Highlights

EPS

$0.50

Net Income

$239MM

Return on Average Equity

17%

Continuing Operations

1M LIBOR

Charge-Off Rate

Margin Offsets to Rising Credit Losses

•

Market funding costs

decline when losses rise

•

Fixed rate APR

accounts

maintain pricing

•

Higher delinquency rates

trigger higher finance

charges and late fees

•

Potential reduction in promo

BTs supports higher yield

•

Higher loan loss reserves

when delinquencies rise

•

I/O asset revalues with

changes in charge-offs and

funding costs

Margin Response to Rising

Credit Losses

Industry Credit Card Losses Generally

Move Opposite to Market Interest Rates

Source:

Federal Reserve and Economy.com

Note(s):

(1)

1Q08 data is quarter to date through 3/11/08

(2)

Represents credit card consumer loan charge-offs for top 100 commercial banks

(%)

(2)

1Q Results –

U.S. Card (Managed Basis)

Note(s):

(1)

Managed receivables

$MM

% MR

(1)

$MM

% MR

(1)

YOY %

Interest Margin

$888

7.7%

$983

8.1%

11%

Other Revenue

490

4.2%

602

5.0%

23%

Total Revenue

$1,378

11.9%

$1,585

13.1%

15%

Charge-Offs

447

3.9%

527

4.3%

18%

Reserve Build

(41)

-0.4%

100

0.8%

N/M

Total Provision

$406

3.5%

$627

5.2%

54%

Expense

572

4.9%

583

4.8%

Pretax Income

$400

3.5%

$375

3.1%

(6%)

Average Receivables (Bn)

$47.0

$48.9

Sales (Bn)

$22.0

$23.2

1Q07

1Q08

Margin Offsets to Rising Credit Losses

U.S. Card (Managed Basis)

(% of Managed Receivables)

1Q07

1Q08

Interest Yield

(1)

12.5%

12.7%

Net Interest Expense

(2)

(4.8%)

(4.6%)

Interest Margin

(3)

7.7%

8.1%

Charge-Offs

(3.9%)

(4.3%)

3.8%

(MM)

Net Revaluation of Retained Interests

$75

Change in Loan Loss Reserve

(100)

Net Impact

($25)

Note(s):

(1)

Managed interest yield on credit card loans

(2)

Interest yield less interest margin

(3)

Net yield on managed loan receivables

Quarter Results

–

Third-Party Payments

(MM)

1Q07

1Q08

YOY %

Total Revenue

$31

$35

12%

Total Expense

Pretax Income

$12

$16

30%

Operating Profit Margin

38%

44%

Volumes (Bn)

PULSE

$20.0

$24.8

24%

Third-Party Issuers

$1.2

$1.5

27%

Managed Balance Sheet

Note(s):

(1)

Includes discontinued operations

Consolidated

(Bn)

11/30/07

2/29/08

Assets

Cash and Cash Equivalents

$8.1

$8.3

Managed Receivables

47.4

46.6

Other Assets

(1)

10.3

11.3

Total Assets

$65.8

$66.2

Liabilities and Equity

Asset-Backed Securitization

$27.0

$27.7

Brokered CD and Other Bank Sources

27.2

27.1

Other Liabilities

(1)

6.0

5.7

Total Liabilities

$60.2

$60.5

Total Equity

5.6

5.7

Total Liabilities and Equity

$65.8

$66.2

Asset-Backed Securitization

ABS Market Update

•

ABS market continues to be

challenging but open for AAA issuance

–

Total 2008 YTD issuance of

$21.6Bn versus $18.6Bn

in 2007 YTD

(1)

•

Depth of market participation has been

reduced and sub bonds are being

retained

•

Discover has been active with two

recent public deals totaling $1.9Bn

•

New issuances at wider spreads and

typically shorter durations

$1.6

$1.1

$2.6

$1.6

$3.7

$1.2

$2.3

$2.9

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

Total ABS Issuance

ABS Maturities

Source:

(1)

Bank

America;

ABS

issuance

through

March

10th

for

2007

and

2008

Issuance

Maturities

Discover Card Master Trust/ DCENT (Bn)

Credit Card Master Trust Excess Spreads

10%

Feb-07

Jan-07

Feb-07

Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Discover

(I/C Subgroup)

Average of JPM, BofA, Citi (CHAIT,BACCT,CCCIT)

$3.5

$18.5

$3.0

Brokered

Direct to Consumer and Others

Sweeps

Bank Deposit Funding

•

CDs are issued through top tier

U.S. wealth management firms

•

Discover continues to focus on

extending maturity profile by

issuing deposits in longer

tenures

•

Direct-to-consumer deposit

issuance continues to grow

Bank Deposits –

1Q08 (Bn)

Contingent Funding Sources

At Spin

(Bn)

June 2007

November 2007

February 2008

Cash

$5.1

$8.3

AAA ABS Capacity

2.4

4.7

6.0

Bank Revolver

2.5

Total Contingent Funding

$10.0

$15.5

$16.9

(1)

Note(s):

(1)

Includes Goldfish liquidity

10.5%

10.2%

11.5%

3Q07

4Q07

1Q08

Capital Management

Tangible Equity/Net Managed

Receivables

Capital Management

•

Capital has strengthened since

spin-off

–

Solid earnings

–

Sale of U.K. business

•

Quarterly dividends of $0.06 per

share since spin-off

•

Authorized up to $1 billion of share

repurchases over the next 3 years

•

Stable long-term ratings at

Discover Bank

•

Fitch

BBB+

•

Moody’s

Baa2

•

S&P

BBB

Note(s):

(1)

Net managed receivables include Goldfish receivables for 3Q07 and 4Q07; have been reclassified to discontinued operations in 1Q08

(1)

2008 Outlook

•

Continued rise in delinquencies and charge-offs (4.75%-5.00% full year)

•

Spreads should widen as cost of funds decreases

•

Funding environment choppy; ABS available, but remain at wider spreads

•

Maintain lower balance transfer volumes/loan growth

•

Maintain prime underwriting focus

•

Remain conservative on liquidity and capital

•

Aggressive focus on payments opportunities

David Nelms

CEO

Q&A