Discover Financial Services (DFS)

DFS 
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Discover Financial Services (DFS)

November 16, 2011 9:50 am ET

Executives

David W. Nelms - Chairman and Chief Executive Officer

Analysts

Unknown Analyst -

Presentation

Kenneth Bruce

Our next presentation will be by David Nelms, the CEO of Discover Financial. Discover, of course, is one of the leading credit card issuers in the U.S. and a growing provider of private student loans. 2011 has been somewhat of a breakout year for Discover as one of the best-performing financial stock, with their stock up about 35% year-to-date. Discover, like other card issuers, has witnessed a significant improvement in its underlying credit performance and has been aggressively positioning to grow its core credit card and student lending businesses.

David will run through an update for Discover and take your questions. David?

David W. Nelms

Thank you, Ken. I was asking Ken how the conference is going, he's like, "Oh another one is upbeat," so I'll try to be a little bit more upbeat than some of the other presentations you have heard about, and certainly excited about our story and thank you for attending.

I'll start with the required disclosure, Safe Harbor and legal disclosures that are in your packets and move on to our first slide, with the overview of our company and -- at Discover, our goal is to leverage our unique assets and capabilities to become the leading direct banking and payments company.

First on the Direct Banking side, let me start with our core card issuing business. We now have $46 billion in card receivables, the leading cash rewards program and a loyal prime customer base with penetration in about 1/4 of U.S. households. And by leveraging our brand, our customer service capabilities, our unsecured lending skills, we're -- have been expanding into other businesses in Direct Banking. Most notably, private student loans and personal loans have accelerated growth and diversified our revenues. And you can see, compared to last year, that is changing a lot, we've got $7 billion in student and personal loans, that does not include the $2.5 billion that we just closed on during the course of this quarter. I'll show another slide that includes that. But also, we have increased to about $24 billion in direct-to-consumer deposits. Now are the leading source of funds in the company is the growing source of customer relationships as we also have served their savings needs.

On the Payments side of the business, we have Discover Network with over $100 billion of volume including not only the Discover Card, but a number of other issuers. PULSE, our PIN debit network has over 4,400 financial institution customers and almost $140 billion in volume. And Diners Club International, which provides an acceptance platform for global acceptance.

2011 has been a great year for us. We've got all-time high sales volumes, all-time low delinquency rates and the reemergence of organic growth in credit cards. This strong performance in sales volume and receivables growth has been driven by our continued focus on rewards, service and value. We've also enjoyed the tailwind from ongoing increases in merchant acceptance and very effective advertising campaigns and sponsorship.

And in addition to organic growth, we've enhanced our earnings potential with 2 important acquisitions. First, we closed on the Student Loan Corporation on December 31, which added almost $4 billion in private student loans and added capabilities of a company that's been around in the student loan business for 50 years. Further, this acquisition gave us a considerable amount of data and a larger reach by adding new schools to our distribution. Second, we closed on the acquisition of the $2.5 billion in additional loans, I just mentioned. These loans were purchased from Citi, but were originated by the Student Loan Corporation team that we have bought earlier, so we know these assets well. These acquisitions and growth in personal loans make our mix of non-card assets to nearly 20%.

In terms of funding, we are now over $25 billion of direct-to-consumer in September as our direct-to-consumer deposit business continues to grow robustly. I think we have had over $1 billion of growth every -- just about every quarter since our spinoff when we started with about $3 billion in direct-to-consumer deposits in '07. Dramatic improvements in credit performance have helped us earn an ROE through the year, much higher than our target. And even excluding reserve releases, we are above our 15% target, and even with carrying a substantial amount of equity.

We do remain focused on capital liquidity and funding. We announced a dividend increase in March and initiated a share repurchase program in the third quarter where we repurchased 1.5% of our shares outstanding in that first quarter of our program.

We are working toward extending our momentum by focusing on a number of key priorities. For Discover Card returning to growth, which we achieved in June of this year driven by gaining wallet share with our existing customers as well as by increasing the number of new accounts. We also continue to leverage our proprietary network, both the growing merchant acceptance as well as high-impact cooperating -- co-op marketing with key merchants. For student and personal loans, we have a number of priorities. In student loans, clearly, our top priority is integrating our acquisition of the Student Loan Corporation, which is progressing very well. And in personal loans, we want to continue generating strong returns as well as focus on expanding into new categories. We continue to leverage the direct-to-consumer deposit funding channels to provide liquidity, and we now have an even greater focus on optimizing the cost, now that it is up to over 1/2 our total funding.

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