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 Issuers JPM Chase Citi B of A CapitalOne Discover Processors Visa Mastercard AMEX Discover

10. Discover vs Visa/Master Card Credit Card Company Credit Card Issuer ConsumerMerchant Credit Card Company Payment Network Credit Card Issuer $100$98 $.25 $1.75 Monthly Fee Discover owns all aspects of Credit card payment operations, and thus captures all revenue points in this model ConsumerMerchant Monthly Fee Transaction Fee Visa/MasterCard: 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

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

20. Comps Analysis Only one close competitor (Capital One) Hard to develop a useful model DFSCOF Price17.5549.44 EPS.913.97 P/E19.8712.45 PEG1.51.72 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