Morgan Stanley 1999 Annual Report Download - page 37

CREDIT SERVICES
STATEMENTS OF INCOME
FISCAL FISCAL FISCAL
(dollars in millions) 1999 1998 1997
Fees:
Merchant and cardmember $1,492 $1,647 $1,704
Servicing 1,194 928 762
Other — 55
Total non-interest revenues 2,686 2,580 2,471
Interest revenue 2,246 2,729 3,123
Interest expense 881 994 1,173
Net interest income 1,365 1,735 1,950
Provision for consumer
loan losses 529 1,173 1,493
Net credit income 836 562 457
Net revenues 3,522 3,142 2,928
Compensation and benefits 525 549 535
Occupancy and equipment 54 67 61
Information processing and
communications 477 462 471
Marketing and business
development 1,041 872 780
Professional services 121 97 73
Other 207 207 251
Total non-interest expenses 2,425 2,254 2,171
Gain on sale of businesses — 362 —
Income before income taxes 1,097 1,250 757
Provision for income taxes 435 529 284
Net income $ 662 $ 721 $ 473
The Company’s Credit Services business is operated by its Discover
Financial Services business unit, which also operates the Discover/
NOVUS Network, a proprietary network of merchant and cash access
locations. The credit cards offered by the Company include the
Discover Card, the Discover Platinum Card, the Morgan Stanley Dean
Witter Card and other proprietary general purpose credit cards.
Fiscal 1999 does not include the results from Prime
Option, the operations of SPS and certain receivables associated
with the discontinued BRAVO Card, all of which were sold during
fiscal 1998. Prime Option, a business the Company had operated
with NationsBank of Delaware, N.A., was sold during the second
quarter of fiscal 1998. The Company sold its interest in the opera-
tions of SPS, which was a 73%-owned, publicly held subsidiary of
the Company, in the fourth quarter of fiscal 1998. The Company
discontinued its BRAVO Card in fiscal 1998 and sold certain credit
card receivables associated with the BRAVO Card in the fourth
quarter of fiscal 1998. Fiscal 1998’s net after-tax gain on the sale
of these businesses was $163 million.
The sale of Prime Option, the operations of SPS and cer-
tain BRAVO receivables reflect the Company’s strategic decision to
focus on the growth of its existing Discover Card and Morgan
Stanley Dean Witter brand names. Reflecting this focus, the
Company introduced the Discover Platinum Card and the Morgan
Stanley Dean Witter Card in fiscal 1999.
In fiscal 1999, Credit Services net income decreased 8%
to $662 million, primarily due to fiscal 1998’s inclusion of the
$163 million net gain on the sale of the above-mentioned busi-
nesses. Excluding this gain, net income increased 19% in fiscal
1999. The increase was primarily attributable to a lower provision
for loan losses and increased servicing fees, partially offset by lower
net interest income and merchant and cardmember fees and higher
marketing and business development expenses. In fiscal 1998, net
income increased 52% to $721 million from $473 million in fis-
cal 1997. Excluding the net gain on the sale of the businesses
mentioned above, net income increased 18% in fiscal 1998. The
increase was primarily attributable to a reduction in the provision
for loan losses primarily resulting from the sale of Prime Option and
the operations of SPS as well as higher servicing fees. The increase
in net income was partially offset by lower net interest income and
increases in marketing and business development expenses and
incremental taxes associated with the sale of the operations of SPS.
As a result of enhancements made to certain of the
Company’s operating systems in the fourth quarter of fiscal 1997,
the Company began recording charged-off cardmember fees and
interest revenue directly against the income statement line items to
which they were originally recorded. Prior to the enhancements,
charged-off cardmember fees and interest revenue both were
recorded as a reduction of interest revenue. While this change had
no impact on net revenues, the Company believes the revised pres-
entation better reflects the manner in which charge-offs affect the
Credit Services statements of income. However, since prior periods
have not been restated to reflect this change, the comparability
of merchant and cardmember fees and interest revenue between
fiscal 1998 and fiscal 1997 has been affected. Accordingly, the
following sections also will discuss the changes in these income
statement categories excluding the impact of this reclassification.
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