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EX-99.2 - EXHIBIT 99.2 - Discover Financial Servicesdfs2020630ex992.htm
EX-99.1 - EXHIBIT 99.1 - Discover Financial Servicesdfs-earningsreleasex2q.htm
8-K - 8-K - Discover Financial Servicesa2q20earnings8k.htm
Exhibit 99.3 2Q20 Financial Results July 22, 2020 ©2020 DISCOVER FINANCIAL SERVICES


 
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 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, 2019, "Risk Factors" and "Management’s Discussion & Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, which is filed with the SEC and available at the SEC's website (www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the Company's Current Report on Form 8-K filed today with the SEC. The Company does not undertake to update or revise forward-looking statements as more information becomes available. 2


 
2Q20 Highlights • Our principal focus continues to be protecting employees, supporting customers, and strengthening the value of the Discover franchise • 2Q20 results reflect a $1.3Bn reserve build in recognition of further deterioration in the economic outlook • Continuing to invest in core capabilities while aligning expenses with the current environment ◦ Operating expenses down YOY excluding a 1-time item ◦ Remain on track for $400MM expense reduction in 2020 • Maintaining disciplined approach to capital management and liquidity ◦ CET1 of 11.7% ◦ $26.9Bn liquidity portfolio; $38.8Bn additional contingency liquidity sources ◦ Stable and diversified funding model; consumer deposits nearly 60% of total funding • Remain conservative due to economic outlook; franchise remains strong and positioned for profitable growth as conditions warrant • 2Q20 Net loss of $368MM; diluted EPS of $(1.20) 3 TAken Stronin


 
2Q20 Summary Financial Results Year-Over-Year Net Income/(Loss) & EPS ($MM, except EPS) $753 $(142) $(48) $327 $1 $(368) $(1,259) 2Q19 Net Total Provision for Operating Income Tax/ 2Q20 Net Interest Non-Interest Credit Losses Expense Capital Action Net Income Income Income Loss 2Q20 $ 2,190 $ 472 $ 2,046 $ 1,077 $ (93) 2Q19 $ 2,332 $ 520 $ 787 $ 1,078 $ 234 B/(W) $ (142) $ (48) $ (1,259) $ 1 $ 327 EPS $ 2.32 $ (0.33) $ (0.11) $ (2.97) $ — $ (0.11) $ (1.20) Highlights • Revenue net of interest expense was $2.7Bn, down 7%, primarily driven by NIM compression and lower net discount and interchange revenue due to the decline in sales volume, partially offset by a $44MM one-time gain on the sale of equity investments • Net interest margin was 9.81% down 66 bps as lower loan yields driven by prime rate decreases were partially offset by lower funding costs • Provision for credit losses increased $1.3Bn reflecting a higher reserve build primarily due to changes in the macroeconomic outlook, and higher net charge-offs • Expenses were flat year-over-year as lower marketing expense was offset by a $59MM intangible impairment charge resulting from a steep reduction in T&E spend impacting the Diners business, as well as higher compensation expense and investments in technology • Net loss of $368MM; diluted EPS of $(1.20) 4


 
2Q20 Key Credit Metrics Highlights Change 2Q19 1Q20 2Q20 QOQ YOY • Credit card net charge-offs up Credit Card Loans 41bps YOY mainly due to Ending Loan Balance ($MM) $72,393 $73,811 $70,201 (4.9)% (3.0)% seasoning of loan growth from Net Principal Charge-off Rate 3.49% 3.65% 3.90% 25 bps 41 bps recent years 30-Day Delinquency Rate 2.34% 2.62% 2.17% (45) bps (17) bps Private Student Loans • Credit card 30-Day delinquency rate down 17bps Ending Loan Balance ($MM) $9,375 $9,957 $9,730 (2.3)% 3.8% YOY due to stable portfolio Net Principal Charge-off Rate 0.61% 0.68% 0.62% (6) bps 1 bps performance and modest (1) 30-Day Delinquency Rate 1.67% 1.64% 1.49% (15) bps (18) bps impact from Skip-a-Pay program Personal Loans Ending Loan Balance ($MM) $7,414 $7,651 $7,316 (4.4)% (1.3)% Net Principal Charge-off Rate 4.33% 3.59% 3.43% (16) bps (90) bps • Personal loan net charge-offs 30-Day Delinquency Rate 1.49% 1.31% 1.07% (24) bps (42) bps down 90bps YOY reflecting underwriting approach and Total Loans portfolio performance Ending Loan Balance ($MM) $90,229 $92,963 $88,927 (4.3)% (1.4)% Net Principal Charge-off Rate 3.22% 3.27% 3.44% 17 bps 22 bps • Student loan credit 30-Day Delinquency Rate (1) 2.18% 2.38% 1.98% (40) bps (20) bps performance remains stable Note(s) 1. 30-Day Delinquency Rate excludes purchased loans 5


 
Allowance for Credit Losses Student Personal ($MM) Credit Card Loans Loans Other Total Loans Balance at January 1, 2020 4,550 653 613 28 5,844 Reserve rate 5.90% 6.76% 7.97% N/A 6.09% Balance at March 31, 2020 5,306 765 807 35 6,913 Reserve rate 7.19% 7.68% 10.55% N/A 7.44% Provision for credit losses(1) 1,873 49 114 2 2,038 Net Charge-offs (688) (15) (64) 0 767 Balance at June 30, 2020 $6,491 $799 $857 $37 $8,184 Reserve rate 9.25% 8.21% 11.71% N/A 9.20% Note(s) 1. Excludes $8MM release of the liability for expected credit losses on unfunded commitments for the six months ended June 30, 2020 as the liability is recorded in accrued expenses and other liabilities 6


 
Sales Volume Trend Weekly Sales Volume Trend (%) Comments 95% • 2Q20 sales volume down 16% YOY 45% ◦ Trends in key categories -5% continue to improve -55% ◦ First half of July down 3% compared to first half of April -105% down 29% Mar Mar Mar Mar Apr Apr Apr Apr May May May May May Jun Jun Jun Jun Jul Jul Jul 7 14 21 28 4 11 18 25 2 9 16 23 30 6 13 20 27 4 11 18 Week Ending • Grocery spending remains strong reflecting a shift in consumer Gas Groceries Retail Restaurants behavior. Services Travel Total Sales Volume Year-Over-Year Sales Volume Trend (%) • Home improvement remains bright MTD spot in retail up 19% for 2Q20 1Q20 2Q20 July 19th Gas —% (48)% (26)% Grocery 14% 14% 14% Retail 6% 7% 15% Restaurants (2)% (43)% (26)% • The most adversely impacted Services (1)% (25)% (5)% categories continued to be travel, Travel (20)% (85)% (69)% All Other 6% (6)% 10% restaurants and gas Total Sales Volume 3% (16)% (3)% Category Definitions • Services includes entertainment, auto, education, medical, and other service providers • All Other includes discount stores, drug stores, wholesale clubs, telecommunication, utilities, insurance, financial services and government 7 keyrends in


 
Skip-a-Payment Programs (1) Weekly Credit Card Balance Enrollments Total Portfolio Balance ($MM) $5.3Bn cumulative balances enrolled $800 since inception of program $700 $673 • Credit card: $3.4Bn; ~ 70% no longer enrolled, of which ~ 80% have made a payment $600 $578 • Student loans(2): $1.2Bn; ~ 35% no $500 $483 longer enrolled, of which ~ 90% have made a payment $400 $368 $340 • Personal loans: $691MM; ~ 65% no $300 longer enrolled, of which ~ 65% have $230 $202 made a payment $200 $142 $119 • Home loans: $70MM; ~ 25% no longer $85 $100 $65 $61 enrolled, of which ~ 80% have made a $50 $40 $33 $36 $35 payment $0 3/22 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31 6/7 6/14 6/21 6/28 7/5 7/12 Note(s) 1. Total Portfolio Balance data as of July 13, 2020 2. Student loan accounts requiring payment; repay, interest only, and immediate repay 8


 
Capital and Funding Funding Trends Capital Trends ($Bn, Average Balance) 94.5 94.4 96.0 97.9 99.6 11.4 11.5 11.8 11.7 10.9 11.0 11.6 11.5 13.0 11.4 11.4 11.4 11.3 15.2 13.7 13.6 14.1 11.1 11.2 16.4 165 17.9 16.8 20.2 19.1 118 109 55.2 58.8 48.2 50.5 53.0 99 93 88 82 79 77 2Q19 3Q19 4Q19 1Q20 2Q20 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 Direct to Consumer Deposits (1) Securitized Borrowings Common Equity Tier 1 Payout Ratio(2) (%) Brokered & Other Deposits Other Borrowings (CET1) Capital Ratio(1) (%) 2Q19 3Q19 4Q19 1Q20 2Q20 (1) Note(s) Direct to Consumer Deposits 51% 53% 55% 56% 59% 1. Common Equity Tier 1 Capital Ratio (Basel III Transition) Brokered & Other Deposits 21% 20% 19% 17% 16% 2. Payout Ratio is displayed on a trailing twelve month basis. This represents the trailing Securitized Borrowings 16% 15% 14% 14% 14% twelve months’ Capital Return to Common Stockholders divided by the trailing twelve Other Borrowings 12% 12% 12% 12% 11% months’ Net Income Allocated to Common Stockholders Note(s) 1. Includes Affinity relationships 9


 
Appendix


 
2Q20 Loan Growth ($Bn) Total Card YOY YOY Highlights (1)% (3)% $95.9 • Card receivables decreased $92.5 $93.0 $77.2 $90.2 $88.9 $74.0 $73.8 reflecting the drop in sales in $72.4 $70.2 the quarter and lower BT/promo activity 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 • Organic student loan growth on track with seasonal trends Organic Student Personal YOY YOY • Personal loans decreased +9% (1)% reflecting lower originations due to recent credit tightening $8.8 $8.4 $8.4 $8.6 $7.6 $7.7 $7.7 actions and higher paydowns $7.9 $7.4 $7.3 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 11


 
2Q20 Payments Volume ($Bn) Discover Network PULSE Highlights YOY YOY • Discover Network volume (15)% +12% declined 15%; deceleration in- line with slowdown in Discover $40.6 $37.9 $38.7 $52.9 card sales volume $50.0 $49.2 $35.2 $47.4 $47.5 $32.3 • PULSE volume up 12% year- over-year driven by higher average spend per transaction 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 related to the pandemic, the impact of stimulus funds available to consumers and Diners (1) Network Partners growth in e-commerce transactions YOY YOY +22% (49)% $8.5 $8.4 $8.8 • Diners Club volume down 49% $7.7 $7.3 $7.1 $7.0 $6.7 from the prior year resulting $6.0 from steep decline in T&E $4.3 spending 2Q19 3Q19 4Q19 1Q20 2Q20 2Q19 3Q19 4Q19 1Q20 2Q20 • Network Partners up 22% driven primarily by AribaPay Total Network Volume down 3% YOY 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 12


 
2Q20 Revenue Inc / (Dec) Highlights ($MM) 2Q20 2Q19 $ % • 6% decrease in net interest income Interest Income $2,672 $2,977 $(305) (10%) driven primarily by NIM compression Interest Expense 482 645 (163) (25%) Net Interest Income 2,190 2,332 (142) (6%) Discount/Interchange Revenue 622 759 (137) (18%) • Net discount and interchange Rewards Cost 385 460 (75) (16%) revenue was down 21% driven by Net Discount/Interchange Revenue 237 299 (62) (21%) the decline in sales volume Protection Products Revenue 44 49 (5) (10%) Loan Fee Income 85 102 (17) (17%) Transaction Processing Revenue 49 48 1 2% • Decrease in loan fee income reflects Other Income 57 22 35 159% lower cash advance fees and lower Total Non-Interest Income 472 520 (48) (9%) late fees Revenue Net of Interest Expense $2,662 $2,852 $(190) (7%) • Other Income up $35MM primarily Change driven by a $44MM one-time gain on 2Q20 2Q19 QOQ YOY the sale of equity investments Discover Card Sales Volume ($MM) $30,721 $36,664 (10)% (16)% Rewards Rate (1) 1.24% 1.25% -16bps -1bps NIM on Loans 9.81% 10.47% -40bps -66bps • Rewards rate was down 1bps YOY reflecting the impact of lower sales Note(s) on Cashback Match and lower 1. Rewards cost divided by Discover card sales volume engagement in the rotating 5% category due to the pandemic 13


 
2Q20 Net Interest Margin Drivers 2Q20 2Q19 Highlights Average Average Interest-Earning Assets ($MM) Balance Yield Balance Yield • Credit card yield of 12.34% was Credit Card $70,848 12.34% $71,492 13.44% down 110 bps YOY primarily driven Private Student 9,826 7.46% 9,464 8.59% by prime rate decreases partially Personal 7,475 12.40% 7,419 13.02% Other 1,622 6.49% 983 6.83% offset by a favorable revolve rate and Total Loans 89,771 11.70% 89,358 12.82% portfolio mix Other Interest-Earning Assets 25,907 0.95% 19,794 2.45% Total Interest-Earning Assets $115,678 9.29% $109,152 10.94% • Average consumer deposits of $58.8Bn grew 22% and composed 2Q20 2Q19 Average Average 59% of total funding Interest-Bearing Liabilities ($MM) Balance Rate Balance Rate Direct to Consumer Deposits (1) $58,813 1.62% $48,211 2.20% Brokered Deposits and Other 16,429 2.52% 20,213 2.71% • The rate on average interest-bearing Interest Bearing Deposits 75,242 1.81% 68,424 2.35% liabilities was 1.95%, down 78bps Borrowings 24,335 2.36% 26,111 3.74% Total Interest-Bearing Liabilities $99,577 1.95% $94,535 2.73% from prior year, primarily driven by lower market rates Change (%) 2Q20 QOQ YOY • Net interest margin on loans was Total Interest Yield on Loans 11.70% -64bps -112bps 9.81% down 66 bps as lower loan NIM on Loans 9.81% -40bps -66bps yields were partially offset by lower NIM on Interest-Earning Assets 7.61% -92bps -96bps funding costs Note(s) 1. Includes Affinity relationships 14


 
2Q20 Operating Expense Highlights Year-Over-Year Expense ($MM) • Employee compensation increase due to higher average salaries and $25 $55 $1,077 $1,078 $16 headcount $(95) $(2) • Marketing expense decreased in response to the slowdown in the US economy with reductions primarily in 2Q19 Employee Marketing Info Prof All 2Q20 brand and acquisition expense Expense Comp Process Fees Other Expense • Information processing increase Inc / (Dec) driven by investments in technology ($MM) 2Q20 2Q19 $ % capabilities and infrastructure Employee Compensation and Benefits $452 $427 $25 6% Marketing and Business Development 129 224 (95) (42%) Information Processing & Communications 117 101 16 16% • Other expense increase driven by a Professional Fees 181 183 (2) (1%) $59MM intangible impairment charge Premises and Equipment 27 26 1 4% resulting from a steep reduction in Other Expense 171 117 54 46% T&E spend impacting the Diners Total Operating Expense $1,077 $1,078 ($1) —% business Operating Efficiency(1) 40.5% 37.8% 270 bps Note(s) 1. Defined as reported total operating expense divided by revenue net of interest expense 15


 
Credit Performance Trends Total Company Loans Credit Card Loans 3.90 3.65 3.25 3.22 3.19 3.27 3.44 3.50 3.49 3.41 3.09 3.11 2.97 3.08 3.05 3.32 3.34 3.14 3.23 3.32 2.31 2.28 2.32 2.40 2.38 2.23 2.08 2.22 2.18 1.98 2.43 2.45 2.50 2.62 2.62 2.33 2.16 2.32 2.34 2.17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 NCO rate (%) NCO rate (%) 30+ day DQ rate (%) 30+ day DQ rate ex-purchased loans (%) Private Student Loans Personal Loans 4.53 4.49 4.33 4.26 4.03 3.97 4.09 3.99 2.25 2.10 2.13 3.59 3.43 2.00 1.78 1.76 1.67 1.72 1.64 1.49 0.92 0.92 0.96 1.02 0.86 0.66 0.61 0.59 0.68 0.62 1.57 1.60 1.37 1.42 1.51 1.49 1.49 1.37 1.31 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 1.07 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 NCO rate (%) 30+ day DQ rate ex-purchased loans (%) NCO rate (%) 30+ day DQ rate (%) 16