Discover Financial

1. Discover Financial NYSE: DFS Phil Rosen Tim Tyson Xiaoting Yang Presented, 4-15-2008

2. Overview • Macro Overview • Industry Analysis • Company • Comparative and Banking Analysis • Stock Performance • Recent Events • Recommendation

3. Macro Overview • Unemployment • Consumer Confidence • Retail Sales • Consumer Credit • Housing Problems

4. Unemployment • Upward trend since early 2007 (Current 5.1%) http://www.forecasts.org/unemploy.htm, Accessed 14 Apr 08

5. Consumer Confidence • Dropped to 64.5 in March from 76.4 in Feb • 25.4% Business conditions are "bad“ (Up from 21.3%) • 25.1%   Jobs are "hard to get" (Up from 23.4%) http://www.conference-board.org/economics/ConsumerConfidence.cfm, Accessed 14 Apr 08

6. Retail Sales • Declining in recent months • Recent Bankruptcies (LIN, SHRP) • Stimulus Checks start getting mailed in May

7. Consumer Credit • Consumer credit increased at an annual rate of 2-1/2 percent in February • Revolving credit increased at an annual rate of 6 percent http://www.federalreserve.gov/Releases/g19/current/, Accessed 14 Apr 08

8. Housing Environment • Increased mortgage delinquency • Rising foreclosures

9. Industry Analysis • Different models operate in the industry

10. Discover vs Visa/Master Card Visa/MasterCard: $.25 Credit Card Company Credit Card Company Monthly Fee Monthly Fee Consumer Merchant Payment Network Consumer Merchant $100 $98 $1.75 Credit Card Issuer Credit Card Issuer • Discover owns all aspects of Credit card payment operations, and thus captures all revenue points in this model Transaction Fee RCMP Presentation on DFS, Dec 2007

11. Company • Spun off by Morgan Stanley June 2007 • Operations: • Discover Payment Network • Pulse ATM Network • Discover Bank

12. Discover Card • Discover cards issued on Discover Network – 6th largest issuer – $47.5B receivables – $105.9B total volume – 3rd largest U.S. merchant network “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

13. “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

14. “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

15. “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

16. Discover Bank and Insurance • Offer typical bank savings products • CDs • Money Market Accounts • Offer several insurance products • Auto Insurance • Homeowners • Term Life • Home Warranty

17. Revenue Streams Problems: Securitization of loans Consumer loan defaults

18. “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

19. Management’s 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 “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08 “Discover Financial Services Financial Community Briefing Presentation”, http://library.corporate-ir.net/library/20/204/204177/items/284599/InvestorDay_032008.pdf, Accessed 14 Apr 08

20. Comps Analysis • Only one close competitor (Capital One) • Hard to develop a useful model Stock Price based on Comps Analysis Using P/E: $11.33 Using P/Bv: $8.91

21. Banking Analysis • Rising Delinquency Rates (Domestic) • 30 Days – increased 7% in 2007 • 90 Days – increased 10% in 2007 • Shrinking Net Interest Margin (COF NIM: 5.3% in 2007)

22. Loan Loss Allowances

23. Stock Performance http://finance.yahoo.com/q/bc?t=1y&s=DFS&l=on&z=m&q=l&c=&c=%5EGSPC, accessed 14 Apr 08

24. Recent Events • Sold off Goldfish Division in Feb 2008 • Acquired Diner’s Club Company • CEO Purchased 15,000 share on April 11th

25. Recommendation • Sell 201 shares at the market • Securitization Problem • Rising Delinquency Problem • Shrinking Net Interest Margin • Consumer Spending

26. Appendix • Diners Club • Purchased for $165m in cash • 2-3 years to integrate systems • 10-15m in annual revenue expected • DFS will not issue cards or service loans (Citi) • Will promote Discover Card internationally • Will allow use of either card on both networks

27. Appendix • Gold Fish • U.K.-based credit-card business • Acquired 2 years ago for $1.7 billion • Sold in Feb 2008 for $70 million • Sold due to large loses and write downs