Attached files
| file | filename |
|---|---|
| EX-99.2 - EXHIBIT 99.2 - Discover Financial Services | dfs20160930ex992.htm |
| EX-99.1 - EXHIBIT 99.1 - Discover Financial Services | dfs-earningsreleasex3q16ex.htm |
| 8-K - 8-K - Discover Financial Services | a3q168k.htm |
October 25, 2016
©2016 DISCOVER FINANCIAL SERVICES
3Q16 Financial Results
Exhibit 99.3
Notice
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, 2015, 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 June 30, 2016, 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.
2
B / (W)
($MM, except per share data) 3Q16 3Q15 $ Δ % Δ
Revenue Net of Interest Expense $2,301 $2,188 $113 5%
Provision for Loan Losses 445 332 (113) (34%)
Operating Expense 895 882 (13) (1%)
Direct Banking 931 950 (19) (2%)
Payment Services 30 24 6 25%
Total Pre-Tax Income 961 974 (13) (1%)
Income Tax Expense 322 362 40 11%
Net Income $639 $612 $27 4%
ROE 23% 22%
Diluted EPS $1.56 $1.38 $0.18 13%
Pre-tax, Pre-Provision Income(1) 1,406 1,306 100 8%
3Q16 Summary Financial Results
• Diluted EPS of $1.56, up 13% YOY
• Revenue net of interest expense of
$2.3Bn, up 5% YOY, as higher net
interest income was partially offset by
higher rewards expense
• Provision for loan losses increased
$113MM, or 34%, due primarily to a
$75MM reserve build
• Expenses increased $13MM, or 1%,
due to marketing investments and
higher regulatory and compliance
staffing costs, partially offset by the
elimination of mortgage-related
expenses
• Income tax expense of $322MM, down
11% YOY, includes one-time items of
$28MM related to the favorable
resolution of certain tax matters
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
3Q15 3Q16
100
80
60
40
20
0
$70.1
$55.7
$8.8
$5.4
$73.6
$58.0
$9.0
$6.3
3Q15 3Q16
50
40
30
20
10
0
$31.4
$36.3
$6.6
$3.2
$31.8 $33.9
$7.3
$3.3
3Q16 Loan and Volume Growth
4
Volume ($Bn)Ending Loans ($Bn)
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
+5%
Card
+4%
Student
+3%
Personal
+16%
PULSE
-6%
Diners(1)
+12%
Network
Partners
+3%
Proprietary
+1%
Total Network Volume down 1% YOY
Payment Services
3Q16 Revenue Detail
• Net interest income of $1.8Bn, up 8%
YOY due primarily to loan growth and
higher net interest margin
• Discount and interchange revenue of
$631MM, up 3% YOY driven by
merchant mix and by the increase in
card sales
• Rewards rate increased 13bps YOY
driven by higher promotional rewards,
primarily double rewards for new
accounts
• Rewards rate expected to be ~119bps
for FY 2016
Note(s)
1. Rewards cost divided by Discover card sales volume
5
B / (W)
($MM) 3Q16 3Q15 $ Δ % Δ
Interest Income $2,184 $2,008 $176 9%
Interest Expense 359 323 (36) (11%)
Net Interest Income 1,825 1,685 140 8%
Discount/Interchange Revenue 631 614 17 3%
Rewards Cost 368 326 (42) (13%)
Net Discount/Interchange Revenue 263 288 (25) (9%)
Protection Products Revenue 60 62 (2) (3%)
Loan Fee Income 91 87 4 5%
Transaction Processing Revenue 40 39 1 3%
Other Income 22 27 (5) (19%)
Total Non-Interest Income 476 503 (27) (5%)
Revenue Net of Interest Expense $2,301 $2,188 $113 5%
Direct Banking $2,233 $2,120 $113 5%
Payment Services 68 68 — —%
Revenue Net of Interest Expense $2,301 $2,188 $113 5%
Change
($MM) 3Q16 3Q15 QOQ YOY
Discover Card Sales Volume $30,683 $30,374 —% 1%
Rewards Rate(1) 1.20% 1.07% -1bp 13bps
3Q16 Net Interest Margin
6
• Net interest margin on receivables
increased 37bps YOY due to higher
total yield partially offset by higher
funding costs
• Total interest yield of 11.82%
increased 45bps YOY driven
primarily by higher card yield
• Credit card yield increased 50bps
YOY due to portfolio mix and the
prime rate increase
• Average direct to consumer and
affinity deposits grew 17% YOY and
made up 46% of total funding
• Funding costs on interest-bearing
liabilities increased 10bps YOY to
1.92% primarily due to higher market
rates and higher FDIC expense
Change
(%) 3Q16 QOQ YOY
Total Interest Yield 11.82% 10 bps 45 bps
NIM on Receivables 9.99% 5 bps 37 bps
NIM on Interest-Earning Assets 8.34% 9 bps 26 bps
3Q16 3Q15
($MM)
Average
Balance Rate
Average
Balance Rate
Credit Card $57,561 12.53% $55,281 12.03%
Private Student 8,795 7.13% 8,580 6.88%
Personal 6,036 12.23% 5,307 12.08%
Other 276 4.96% 294 4.44%
Total Loans 72,668 11.82% 69,462 11.37%
Other Interest-Earning Assets 14,382 0.68% 13,312 0.52%
Total Interest-Earning Assets $87,050 9.98% $82,774 9.62%
Direct to Consumer and Affinity $34,488 1.26% $29,477 1.23%
Brokered Deposits and Other 14,267 1.90% 16,857 1.55%
Interest Bearing Deposits 48,755 1.45% 46,334 1.35%
Borrowings 25,484 2.82% 23,910 2.74%
Total Interest-Bearing Liabilities $74,239 1.92% $70,244 1.82%
B / (W)
($MM) 3Q16 3Q15 $ Δ % Δ
Employee Compensation and Benefits $342 $337 ($5) (1%)
Marketing and Business Development 195 168 (27) (16%)
Information Processing & Communications 81 84 3 4%
Professional Fees 143 160 17 11%
Premises and Equipment 25 24 (1) (4%)
Other Expense 109 109 — —%
Total Operating Expense $895 $882 ($13) (1%)
Direct Banking $857 $838 ($19) (2%)
Payment Services 38 44 6 14%
Total Operating Expense $895 $882 ($13) (1%)
Operating Efficiency(1) 38.9% 40.3% 140 bps
Adjusted Operating Efficiency(2) 38.9% 38.0% -90 bps
3Q16 Operating Expense Detail
7
• Employee compensation and
benefits of $342MM, up 1% YOY
primarily due to higher regulatory
and compliance staffing
• Marketing and business
development expenses up 16%
YOY primarily due to incremental
investments to drive new card
accounts
• Professional fees of $143MM, down
11% YOY, primarily due to the
completion of look back related
anti-money laundering remediation
expenses in 2Q16
• 3Q15 included $23MM in expenses
related to the wind-down of the
home loans business
Note(s)
1. Defined as reported total operating expense divided by revenue net of interest expense
2. 3Q15 operating efficiency ratio adjusted for $28 million in look back related anti-money laundering remediation expenses, and revenue of $2 million and expense of $23 million
excluded due to exiting the home loans business. 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
3Q16 Provision for Loan Losses and Credit Quality
8
• Net charge-offs of $370MM, up 14%
YOY and reserve build of $75MM
both primarily due to loan growth
• Card net charge-off rate increased
13bps YOY to 2.17%
• Card 30+ day delinquency rate of
1.87% increased 22bps YOY
• Student loan net charge-off rate
excluding PCI loans of 1.02%, up
8bps YOY
• Personal loan net charge-off rate of
2.63%, up 64bps YOY
Note(s)
1. Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation
of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of
loans, it is all considered to be performing
B / (W)
($MM) 3Q16 3Q15 $ Δ % Δ
Net Principal Charge-Off $370 $324 ($46) (14%)
Reserve Changes build/(release) 75 8 (67) NM
Total Provision for Loan Loss $445 $332 ($113) (34%)
Change
(%) 3Q16 QOQ YOY
Credit Card Loans
Gross Principal Charge-Off Rate 2.93% -28 bps 10 bps
Net Principal Charge-Off Rate 2.17% -22 bps 13 bps
30-Day Delinquency Rate 1.87% 24 bps 22 bps
Reserve Rate 2.86% 6 bps 24 bps
Private Student Loans
Net Principal Charge-Off Rate (excl. PCI Loans)(1) 1.02% -8 bps 8 bps
30-Day Delinquency Rate (excl. PCI Loans)(1) 1.87% -1bp -1 bp
Reserve Rate (excl. PCI Loans)(1) 1.92% -3 bps 8 bps
Personal Loans
Net Principal Charge-Off Rate 2.63% 25 bps 64 bps
30-Day Delinquency Rate 0.98% -4 bps 18 bps
Reserve Rate 2.98% -9 bps 49 bps
Total Loans
Gross Principal Charge-Off Rate (excl. PCI Loans)(1) 2.77% -22 bps 13 bps
Net Principal Charge-Off Rate (excl. PCI Loans)(1) 2.10% -17 bps 16 bps
30-Day Delinquency Rate (excl. PCI Loans)(1) 1.79% 19 bps 19 bps
Reserve Rate (excl. PCI Loans)(1) 2.81% 4 bps 24 bps
Capital Position
9
Note(s)
1. Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Basel III Fully Phased-in Common Equity Tier 1 Capital, a non-GAAP measure. The
Company believes that the Common Equity Tier 1 Capital Ratio based on Fully Phased-in Basel III rules is an important complement to the existing capital ratios and for
comparability to other financial institutions. For the corresponding reconciliation of Common Equity Tier 1 Capital and risk weighted assets calculated under Fully Phased-in
Basel III rules to Common Equity Tier 1 Capital and risk weighted assets calculated under Basel III transition rules, see appendix
Capital Ratios
• Common Equity Tier 1 Capital Ratio (Basel
III fully phased-in) down 40bps sequentially
due to capital deployment and loan growth
• Repurchased $582MM of shares including
the additional $100MM previously
announced following the non-objection by
the Federal Reserve to our de minimis
request
Basel III Transition
3Q16 2Q16 3Q15
Total Risk Based Capital Ratio 16.3% 16.7% 17.1%
Tier 1 Risk Based Capital Ratio 14.6% 15.0% 15.2%
Tier 1 Leverage Ratio 12.6% 12.8% 13.1%
Common Equity Tier 1 Capital Ratio 13.9% 14.3% 14.4%
Basel III Fully Phased-in
Common Equity Tier 1 Capital Ratio(1) 13.8% 14.2% 14.3%
Appendix
Reconciliation of GAAP to Non-GAAP Data
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
11
Quarter Ended
(unaudited, in millions, except per share statistics) Sep 30, 2016 Sep 30, 2015
Provision for loan losses $445 $332
Income before income taxes 961 974
Pre-tax, pre-provision income(1) $1,406 $1,306
Revenue net of interest expense $2,301 $2,188
Excluding 3Q15 revenue associated with the Home Loans business — 2
Adjusted revenue net of interest expense $2,301 $2,186
Total operating expense 895 882
Excluding anti-money laundering and related compliance program expenses — 28
Excluding expenses related to exiting Home Loans business — 23
Adjusted operating expense $895 $831
Adjusted operating efficiency(2) 38.9% 38.0%
Reconciliation of GAAP to Non-GAAP Data (cont'd)
Quarter Ended
(unaudited, in millions) Sep 30, 2016 Jun 30, 2016 Sep 30, 2015
Note(s)
1. Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion
2. Key differences under fully phased-in Basel III rules in the calculation of risk weighted assets include higher risk weighting for past due loans and unfunded commitments
3. Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Common Equity Tier 1 Capital (Basel III Fully Phased-in), a non-GAAP measure, divided by Risk
Weighted Assets (Basel III Fully Phased-in)
12
Common Equity Tier 1 Capital (Basel III Transition) $10,618 $10,677 $10,612
Adjustments Related to Capital Components During Transition(1) (52) (53) (82)
Common Equity Tier 1 Capital (Basel III Fully Phased-in) $10,566 $10,624 $10,530
Risk Weighted Assets (Basel III Transition) $76,560 $74,892 $73,526
Risk Weighted Assets (Basel III Fully Phased-in)(2) $76,493 $74,824 $73,423
Common Equity Tier 1 Capital Ratio (Basel III Transition) 13.9% 14.3% 14.4%
Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in)(3) 13.8% 14.2% 14.3%