Morgan Stanley 1999 Annual Report Download - page 39

decline in credit losses from securitized consumer loans resulting
from a lower level of charge-offs related to the Discover Card portfo-
lio and the positive impact of the sale of the operations of SPS, par-
tially offset by an increase in the level of average securitized loans.
The increase in servicing fees in fiscal 1998 was due to higher lev-
els of net interest cash flows and increased fee revenue, partially off-
set by increased credit losses from securitized consumer loans, which
were primarily a result of higher levels of average securitized loans.
Net Interest Income
Net interest income is equal to the difference between interest rev-
enue derived from consumer loans and short-term investment
assets and interest expense incurred to finance those assets. Credit
Services assets, consisting primarily of consumer loans, currently
earn interest revenue at fixed rates and, to a lesser extent, market-
indexed variable rates. The Company incurs interest expense at
fixed and floating rates. Interest expense also includes the effects
of interest rate contracts entered into by the Company as part of its
interest rate risk management program. This program is designed
to reduce the volatility of earnings resulting from changes in inter-
est rates and is accomplished primarily through matched financing,
which entails matching the repricing schedules of consumer loans
and the related financing.
The following tables present analyses of Credit Services
average balance sheets and interest rates in fiscal 1999, fiscal
1998 and fiscal 1997 and changes in net interest income during
those fiscal years:
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AVERAGE BALANCE SHEET ANALYSIS
FISCAL 1999 FISCAL 1998(3) FISCAL 1997(3)
AVERAGE AVERAGE AVERAGE
(dollars in millions) BALANCE RATE INTEREST BALANCE RATE INTEREST BALANCE RATE INTEREST
ASSETS
Interest earning assets:
General purpose credit
card loans $16,173 13.10% $2,118 $17,184 13.87% $2,383 $19,512 14.03% $2,738
Other consumer loans 4 8.98 — 1,374 16.70 229 1,773 15.73 279
Investment securities 672 5.16 35 496 6.25 31 176 5.45 10
Other 1,656 5.61 93 1,465 5.88 86 1,680 5.75 96
Total interest earning assets 18,505 12.14 2,246 20,519 13.30 2,729 23,141 13.49 3,123
Allowance for loan losses (774) (847) (828)
Non-interest earning assets 1,544 1,517 1,529
Total assets $19,275 $21,189 $23,842
LIABILITIES AND SHAREHOLDER’S EQUITY
Interest bearing liabilities:
Interest bearing deposits
Savings $ 1,492 4.51% $ 67 $ 1,073 4.79% $ 51 $ 963 4.27% $ 41
Brokered 5,609 6.37 357 5,656 6.62 375 4,589 6.66 306
Other time 1,927 5.61 108 2,189 6.16 135 2,212 6.12 135
Total interest bearing
deposits 9,028 5.90 532 8,918 6.29 561 7,764 6.21 482
Other borrowings 6,046 5.76 349 7,162 6.05 433 11,371 6.07 691
Total interest bearing
liabilities 15,074 5.84 881 16,080 6.18 994 19,135 6.13 1,173
Shareholder’s equity/other
liabilities 4,201 5,109 4,707
Total liabilities and
shareholder’s equity $19,275 $21,189 $23,842
Net interest income $1,365 $1,735 $1,950
Net interest margin(1) 7.38)%8.46)% 8.43)%
Interest rate spread(2) 6.30% 7.12% 7.36%
(1) Net interest margin represents net interest income as a percentage of total interest earning assets.
(2) Interest rate spread represents the difference between the rate on total interest earning assets and the rate on total interest bearing liabilities.
(3) Certain prior-year information has been reclassified to conform to the current year’s presentation.