William Blair 37 th Annual Growth Stock Conference David Nelms Chairman & Chief Executive Officer June 15, 2017 2017 DISCOVER FINANCIAL SERVICES 1
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. This presentation is available on the Company s website (www.discover.com) and the SEC s website (www.sec.gov). Throughout these materials, direct-to-consumer deposits are referred to as DTC deposits or direct deposits. DTC, or direct, deposits are deposit products that we offer to customers through direct marketing, internet origination and affinity relationships. DTC, or direct, deposits include certificates of deposits, money market accounts, online savings and checking accounts, and IRA certificates of deposit. 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. 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
Franchise Overview Positioned as the leading U.S. direct bank & payments partner Direct Banking (97% of DFS Pre-Tax Profit) Payment Services (3% of DFS Pre-Tax Profit) U.S. Card Issuing $60Bn card receivables $123Bn card sales volume Leading cash rewards program 1 in 4 U.S. households (1) $139Bn volume 4,600+ issuers $29Bn volume (2) Deposits and Lending $37Bn direct-to-consumer deposits Cashback checking $9Bn private student loans $7Bn personal loans Home equity installment loans Network Partners 90+ licensees 185+ countries / territories $14Bn volume 10+ network alliances Note(s) Balances as of March 31, 2017; pre-tax profit and volume based on the trailing four quarters ending 1Q17 (unless noted) 1. 2016 TNS Consumer Payment Strategies Study 2. Diners 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 3
Franchise Overview Vision, strategic objectives and goal Vision Be the leading direct bank and payments partner Focus areas and strategic objectives Achieve profitable, disciplined growth Excel at serving our customers; simple, secure experience with deep relationships Offer differentiated products Leverage payments network Manage risk prudently Invest for the future Build awareness and consideration Enhance capabilities and operating model Goal Create long-term shareholder value 4
Franchise Overview Business model has expanded and diversified (All data in billions) Loans Funding Network Volume Net Income $77 $77 $307 $2.4 $53 $54 $186 $0.6 (1) (1) (1) (1) 2007 2016 2007 2016 2007 2016 2007 2016 Card Non-Card Other ABS Brokered Direct Deposits Credit (2) Debit Note(s) 1. 2007 data is as of fiscal year ending November 30, 2007 2. Includes Network Partners volume 5
Net Interest Margin Asset sensitivity helped drive NIM expansion in 2016 Net Interest Margin 9.68% 0.14% 0.15% 0.02% 9.99% 2015 Change in market rates Portfolio mix and other Interest chargeoffs 2016 2017 NIM guidance: slightly higher than 2016 The benefit of incremental increases in the prime rate will be partially offset by higher: Wholesale funding costs Balance transfer and promotional balances Deposit betas Interest charge-offs 6
Payments Leverage payments assets to support card issuing Brand recognition Merchant funded rewards Flexibility and control Emerging technologies 7
Card Proprietary network helps drive brand recognition Average Unaided Card Brand Awareness 64 56 53 53 29 29 19 13 6 V MA DFS AXP COF JPM C BAC WFC Source: 2016 Millward Brown Brand Tracking Study 8
Card Loan growth has been consistent and profitable 8% (1) Growth STDEV Avg ROE DFS 1.3% 21% Industry 2.5% 9% 6% 4% 2% 0% 1Q14 1Q15 1Q16 1Q17-2% DFS Industry Source: Company filings. Industry includes AXP, BAC, C, COF, JPM, SYF, WFC. Note(s) 1. Standard deviation of quarterly loan growth 9
Card Recognized leader in customer satisfaction and loyalty Brand Strength Customer Satisfaction Recommend to a Friend (1) Wells Fargo Bank of America American Express Citibank Discover Capital One Chase Consideration (2) Source: 2016 Brand Health Tracker Study, Millward Brown Note(s) 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 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 10
Card Digital driving customer experience and efficiencies Mobile Experiences 2016 Digital Efficiency Metrics Applications: Website Mobile 47% 40% Digital Payments 64% Mobile Logins 50% Single Sign On Portal Balance Transfer Offers 11
Card One s view on credit depends on one's perspective 10% Card Net Charge-off (NCO) Rate 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 12
Card Net charge-off rate remains among the lowest in the industry 6.0% 1Q17 NCO Rate 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Company filings (1) (2) (3) (3) (4) (3) (5) (6) AXP BAC DFS JPM C WFC COF SYF Note(s) 1. U.S. Consumer Services card member loans 2. U.S. Card 3. Credit card 4. North America Citi-Branded Cards 5. Domestic Card 6. Total company 13
Card Charge-off drivers (1) Seasoning NCOs NCOs Normalization (Mean Reversion) Through-the-cycle average 0 1 2 3 4 Seasonality Years from Origination NCOs NCOs Time Macroeconomic fundamentals Q1 Q2 Q3 Q4 Note(s) 1. Illustrative depictions; graphs do not represent actual data 14 Recession Time
Card Recessions trigger cyclical consumer credit inflections 7% U.S. Consumer NCO Rate and Unemployment Rate 12% 6% 10% 5% 4% 3% 2% 1% Unemployment Rate (RHS) Consumer NCO Rate (LHS) 8% 6% 4% 2% 0% 1Q85 1Q89 1Q93 1Q97 1Q01 1Q05 1Q09 1Q13 0% Source: Federal Reserve, BLS, NBER Economic recession 15
Index, 1Q80=100 Thousands Card Consumer credit fundamentals remain favorable 700 600 500 400 300 Initial Jobless Claims 200 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17 11% 10% 9% 8% 7% 6% 5% 4% Unemployment Rate 3% Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 400 Home Prices Debt to Disposable Income Ratio 6.5% 6.0% 350 5.5% 5.0% 300 4Q07 4Q09 4Q11 4Q13 4Q15 4.5% 1Q07 1Q09 1Q11 1Q13 1Q15 Source: DOL, BLS, FHFA, Federal Reserve 16
Private Student Loans Discover is one of the largest private student lenders Overview Not-for-profit schools with 4-year undergraduate or graduate degree programs, bar and residency loans - 99 of top 100 national universities (1) - 50 of top 50 medical, law and graduate business schools (1) Cosigner rate of ~90% on originations Average FICO > 750 at acquisition (2) School certification and direct disbursement to school for all graduate and undergraduate borrowers 2.0% 1.5% 1.0% 0.5% 0.0% $7.8 Note(s) 1. Placement of Discover brand at schools that use a lender list; rankings based on 2017 U.S. News and World Report 2. The higher of the borrower or the co-signer at origination on the organic portfolio 3. Includes CitiAssist branded originated loans for 2012 17 Loans ($Bn) $8.1 $8.5 $8.8 $9.0 $2.6 $6.4 2012 2013 2014 2015 2016 Purchased Portfolios Total NCO rate Organic (3) $10.0 $9.0 12-16 $8.0 CAGR -14% $7.0 $6.0 $5.0 12-16 CAGR $4.0 20% $3.0 $2.0 $1.0 -
Personal Loans Driving disciplined, profitable growth Overview Loans ($Bn) Superior alternative for consolidating debt Typical installment loan characteristics: 3- to 7-year term Up to $35,000 4% 3% 2% $3.3 2012-2016 18% CAGR $4.2 $5.0 $5.5 $6.5 $7.0 $6.0 $5.0 $4.0 $3.0 Average portfolio FICO of 745 Two-thirds of borrowers have a Discover credit card 1% $2.0 $1.0 0% 2012 2013 2014 2015 2016 - Total Loans Outstanding 6-month Lagged Charge-off Rate (1) Note(s) 1. An example calculation of 6-month Lagged Charge-off Rate: net principal charge-offs for the 12 months ending December 31, 2016 divided by average loan balance of the 12 months ending June 30, 2016 18
Direct-to-Consumer Deposits (DTC) Funding asset growth with high quality deposits DTC Deposits ($Bn) $36 DTC Balances by Life of Relationship $28 39% 31% 16% 45% 53% 16% 2012 2016 2012 2016 4+ Years 2-4 Years < 2 years 19
Direct-to-Consumer Deposits Low deposit betas have contributed to asset sensitivity Savings 12M CD 1.6% 1.6% 1.2% 0.8% 0.4% 0.0% 1.2% 0.8% 0.4% 0.0% DFS Fed Funds Target DFS Fed Funds Target 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 60M CD Deposit Betas Deposit betas were essentially zero through the first two Fed rate hikes Direct banks began to raise deposit rates after the March 2016 rate hike, though deposit betas remain below long-term averages Note(s) 1. Direct peer represents the median of: ALLY, AXP, BCS, CIT, COF, EVER, GS, Nationwide, SLM, SYF, USAA DFS 5Yr Swap 20
Capital Strong capital levels allow for significant capital returns 2016 Total Yield (1) DFS Common Equity Tier 1 Ratio (2) 11.8% 10.4% 8.2% 7.0% 6.6% Expected Target 13.4% 10% - 11% 4.4% COF DFS AXP C JPM BAC 1Q17 Source Public Company Disclosures Note(s) 1. 2016 common dividends plus gross share repurchases divided by market capitalization at 12/31/15 2. Common Equity Tier 1 Capital Ratio (Basel III Transition) 21
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