7 January 2019 Specialty Finance 2 Americas/United States Specialty FinanceDiscover Financial Services(DFS) Rating OUTPERFORM Price (04-Jan-19, US$)61.29 Target price (US$)(from 95.00) 83.00 52-week price range (US$)81.31 - 55.09 Market cap(US$ m)20,591 Enterprise value (US$ m)20,591 Target price is for 12 months. Research Analysts Moshe Orenbuch 212 538 6795 moshe.orenbuch@credit-suisse 2019 Outlook ■Our 2018/2019/2020 EPS estimates are $7.81/$8.75/$9.70. ■We lower our target price to $83 given the recent compression in multiple ofthe broad market. Our target price implies share can trade at 9x our 2019EPS estimate. ■Risks to our EPS/thesis/rating/target price include greater than expectedprovision expense, accelerating competition, higher operating expenses, andlower capital return. Share price performance DFS.NS&P 500 INDEX Jan-18Apr-18Jul-18Oct-18Jan-19 50 60 70 80 90 On 04-Jan-2019 the S&P 500 INDEX closed at 2531.94 Daily Jan05, 2018 - Jan04, 2019, 01/05/18 = US$78.16 Quarterly EPSQ1Q2Q3Q4 2017A1.431.401.590.99 2018E1.821.912.052.04 2019E2.182.012.282.29 Financial and valuation metrics Year12/17A12/18E12/19E12/20E EPS (CS adj.) (US$)5.427.818.759.70 Prev. EPS (US$)-7.75-- P/E (x)11.37.87.06.3 Relative P/E (%)58504848 Revenue (US$ m)9,897.010,715.011,430.912,004.3 Pre provision Income (US$ m)6,1166,6857,1677,590 Book Value (US$)28.5831.3035.6540.70 Tangible book value (US$)27.4230.0434.2939.26 ROE (%)19.326.226.325.4 ROA (%)2.112.572.492.43Book Value (Next Qtr., US$)31.30Tangible BV (Next Qtr) (US$)30.04 P/BV (x) (Next Qtr.)2.0P/TBV (Next Qtr) (x)2.0 Dividend (Next Qtr) (US$)1.60Shares Outstanding (m)336 Dividend yield (%)2.1 Source: Company data, Thomson Reuters, Credit Suisse estimates 7 January 2019 Specialty Finance 3 Discover Financial Services (DFS) Price (04 Jan 2019):US$61.29 ; Rating:OUTPERFORM ; Target Price:(from 95.00) 83.00 ; Analyst:Moshe Orenbuch Income Statement12/17A12/18E12/19E12/20E Net interest income8,0008,7659,4099,901 Non interest income1,8971,9502,0222,104 Total revenue9,89710,71511,43112,004 Total expenses3,7814,0304,2644,414 Operating profit before provisions6,1166,6857,1677,590 Loan loss provisions2,5793,0703,4263,758 Operating profit3,5373,6153,7413,832 Pre-tax profit3,5373,6153,7413,832 Income tax (expense)1,249869906939 Net profit before minorities2,2882,7462,8352,893 Minority interests (P&L)---- Shareholders (US$)2,0312,6952,7872,846 Balance Sheet12/17A12/18E12/19E12/20E Assets Gross loans84,24890,34095,672100,784 Allowance for loan losses2,6213,0843,4593,750 Net loans81,62787,25692,21397,034 Intangible assets and goodwill418416412408 Total Assets100,087109,288114,620119,732 Liabilities Total deposits58,764000 Other liabilities30,53098,371103,235107,625 Total liabilities89,29498,371103,235107,625 Shareholders' equity10,79310,91811,38512,107 Minority interests---- Preferred stock560560560560 Total liabilities and shareholders'100,087109,288114,620119,732 Per share12/17A12/18E12/19E12/20E Equiv. FPO (period Avg.) (mn)375345319293 EPS (CS Adj.) (US$)5.47.88.79.7 Prev. EPS(US$)-7.75-- DPS (US$)1.31.51.71.8 Dividend Payout (%)24.019.219.018.6 Operating CFPS (US$)9.310.411.713.0 Earnings12/17A12/18E12/19E12/20E Growth and balance sheet (%) Revenue growth0000 Operating expenses growth0000 Pre-provisional op. profit growth0000 Net profit growth(0)000 Deposit growth0(1) LTD ratio (E, %)1 Returns12/17A12/18E12/19E12/20E Profitability and margins (%) Efficiency ratio (12/17A, %)38383737 ROE - CS adj.return on equity19262625 Operating ROA (%)2322 Gearing (X)0000 Net Interest margin (E, %)10101010 Quarterly EPSQ1Q2Q3Q4 2017A1.431.401.590.992018E1.821.912.052.04 2019E2.182.012.282.29 Company Background Discover Financial Services (DFS) is a direct banking and paymentservices company. DFS operates as a bank holding and financialholding company. DFS operates two banking subsidiaries: DiscoverBank and Bank of New Castle. Blue/Grey Sky ScenarioOur Blue Sky Scenario (US$)(from 122.00) 107.00 Our Blue Sky valuation of $107 contemplates faster loan and spendgrowth, 50 bps additional rise in rates, better credit performance,more capital return and a lower tax rate. This could result in ~29%increase in 2019 EPS, and our scenario valuation represents 9.5xPE Our Grey Sky Scenario (US$)(from 72.00) 55.00 Our Grey Sky valuation of $55 contemplates slower growth andhigher losses. This could result in ~11% lower 2019 EPS, and ourscenario valuation represents 7x PE Share price performance DFS.NS&P 500 INDEX Jan-18Apr-18Jul-18Oct-18Jan-19 50 60 70 80 90 On 04-Jan-2019 the S&P 500 INDEX closed at 2531.94 Daily Jan05, 2018 - Jan04, 2019, 01/05/18 = US$78.16 Source: Company data, Thomson Reuters, Credit Suisse estimates 7 January 2019 Specialty Finance 4 Americas/United States Specialty FinanceAmerican Express Co.(AXP) Rating UNDERPERFORM Price (04-Jan-19, US$)97.64 Target price (US$)(from 96.00) 93.00 52-week price range (US$)112.89 - 88.34 Market cap(US$ m)83,410 Enterprise value (US$ m)83,410 Target price is for 12 months. Research Analysts Moshe Orenbuch 212 538 6795 moshe.orenbuch@credit-suisse 2019 Outlook ■Our 2018/2019/2020 EPS estimates are $7.42/$7.85/$8.60. ■We lower our target price to $93 given the recent compression in multiple ofthe broad market. Our target price implies share can trade at 12x our 2019EPS estimate. ■Risks to our EPS/thesis/rating/target price include greater than expectedprovision expense, accelerating competition, higher operating expenses, andlower capital return. Share price performance AXP.NS&P 500 INDEX Jan-18Apr-18Jul-18Oct-18Jan-19 80 90 100 110 120 On 04-Jan-2019 the S&P 500 INDEX closed at 2531.94 Daily Jan05, 2018 - Jan04, 2019, 01/05/18 = US$101.08 Quarterly EPSQ1Q2Q3Q4 2017A1.341.471.50-1.41 2018E1.861.851.881.83 2019E1.871.961.992.04 Financial and valuation metrics Year12/17A12/18E12/19E12/20E EPS (CS adj.) (US$)2.967.427.858.60 Prev. EPS (US$)-7.357.80- P/E (x)33.013.212.411.4 Relative P/E (%)170848586 Revenue (US$ m)33,471.040,402.743,508.247,060.8 Pre provision Income (US$ m)10,17311,70312,64913,830 Book Value (US$)20.9525.2828.0131.29 Tangible book value (US$)16.3020.5623.1326.27 ROE (%)13.432.329.529.0 ROA (%)1.543.373.203.18Book Value (Next Qtr., US$)25.28Tangible BV (Next Qtr) (US$)20.56 P/BV (x) (Next Qtr.)4.0P/TBV (Next Qtr) (x)4.7 Dividend (Next Qtr) (US$)1.56Shares Outstanding (m)854 Dividend yield (%)1.4 Source: Company data, Thomson Reuters, Credit Suisse estimates 。。。。。。