Morgan Stanley 1998 Annual Report Download - page 33

*THIRTY
-SEVEN *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT
SUPPLEMENTAL AVERAGE MANAGED LOAN INFORMATION
FISCAL 1998 FISCAL 1997 FISCAL 1996
AVERAGE Average Average
(dollars in millions) BALANCE RATE Balance Rate Balance Rate
Consumer loans $34,619 14.86% $34,619 14.83% $31,459 14.83%
General purpose credit card loans 32,684 14.72 32,176 14.72 29,021 14.81
Total interest earning assets 36,580 14.41 36,475 14.38 32,770 14.46
Total interest bearing liabilities 32,141 6.16 32,469 6.17 29,277 6.22
Consumer loan interest rate spread 8.70 8.66 8.61
Interest rate spread 8.25 8.21 8.24
Net interest margin 9.00 8.89 8.90
Provision for Consumer Loan Losses
The provision for consumer loan losses is the amount necessary to
establish the allowance for loan losses at a level that the Company
believes is adequate to absorb estimated losses in its consumer loan
portfolio at the balance sheet date. The Company’s allowance for loan
losses is regularly evaluated by management for adequacy on a
portfolio-by-portfolio basis and was $787 million at November 30,
1998 and $884 million at November 30, 1997.
The provision for consumer loan losses, which is
affected by net charge-offs, loan volume and changes in the amount
of consumer loans estimated to be uncollectable, decreased 21% in
fiscal 1998 and increased 23% in fiscal 1997. The decrease in fis-
cal 1998 was due to a decrease in net charge-offs resulting from lower
average levels of owned consumer loans, primarily attributable to an
increased level of securitized loans and reduced levels of charge-offs
associated with the sale of Prime Option and SPS receivables, par-
tially offset by a small increase in the net charge-off rate of the
Discover Card portfolio. The provision for loan losses also was posi-
tively impacted by a decline in the loan loss allowance in connection
with securitization transactions entered into prior to the third quar-
ter of 1996. The Company expects this loan loss allowance will be
fully amortized over fiscal 1999. In fiscal 1997, the increase in con-
sumer loan losses was primarily due to higher net charge-offs, which
resulted from an increase in the percentage of consumer loans
charged off and a higher level of average consumer loans outstand-
ing. The Company’s expectations about future charge-off rates and
credit quality are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above.
Factors that influence the provision for consumer loan losses include
the level and direction of consumer loan delinquencies and charge-
offs, changes in consumer spending and payment behaviors, bank-
ruptcy trends, the seasoning of the Company’s loan portfolio, interest
rate movements and their impact on consumer behavior, and the rate
and magnitude of changes in the Company’s consumer loan portfo-
lio, including the overall mix of accounts, products and loan balances
within the portfolio.
Consumer loans are considered delinquent when inter-
est or principal payments become 30 days past due. Consumer
loans are charged-off when they become 180 days past due, except
in the case of bankruptcies and fraudulent transactions, where
loans are charged-off earlier. Loan delinquencies and charge-offs are
primarily affected by changes in economic conditions and may vary
throughout the year due to seasonal consumer spending and payment
behaviors. Delinquency rates decreased in fiscal 1998 as a reflec-
tion of the Company’s increased focus on credit quality and account
collections, as well as the sale of Prime Option, SPS and BRAVO.
From time to time, the Company has offered and may
continue to offer cardmembers with accounts in good standing the
The supplemental table below provides average man-
aged loan balance and rate information which takes into account
both owned and securitized loans: