Morgan Stanley 1998 Annual Report Download - page 35

*THIRTY
-NINE *
MORGAN STANLEY DEAN WITTER *1998 ANNUAL REPORT
The increase in fiscal 1997 was primarily attributable to higher card-
member rewards expense and marketing and promotional costs.
Higher marketing and promotional costs were associated with the
growth of new and existing credit card brands. Cardmember rewards
expense includes the Cashback Bonus®award, pursuant to which
the Company annually pays Discover Cardmembers and Private
Issue Cardmembers electing this feature a percentage of their pur-
chase amounts ranging up to 1% (up to 2% for the Private Issue
Card) based upon a cardmember’s level of annual purchases. Higher
cardmember rewards expense in both years was associated with
growth in credit card transaction volume and increased credit card-
member qualification for higher award levels. Commencing March
1, 1998, the terms of the Private Issue Cashback Bonus program
were amended by limiting the maximum annual bonus amount to
$500 and by increasing the amount of purchases required to
receive this bonus amount. Cardmember rewards expense was not
materially impacted by these changes.
Professional services expense increased 34% in fiscal
1998 and 40% in fiscal 1997. The increase in fiscal 1998 was due
to services related to increased partnership program activity, higher
expenditures for consumer credit counseling and collections services
and consulting fees. The increase in fiscal 1997 was primarily due
to higher expenditures for consumer credit counseling and collec-
tions services.
Other non-interest expenses decreased 17% in fiscal
1998 and 9% in fiscal 1997. Other expenses primarily include fraud
losses, credit inquiry fees and other administrative costs. The
decrease in both years was due to a continuing decline in the level
of fraud losses. Fiscal 1998 also reflects a lower level of expenses
resulting from the sale of Prime Option and the operations of SPS.
Seasonal Factors
The credit card lending activities of Credit and Transaction Services
are affected by seasonal patterns of retail purchasing. Historically,
a substantial percentage of credit card loan growth occurs in the
fourth calendar quarter, followed by a flattening or decline of con-
sumer loans in the following calendar quarter. Merchant fees, there-
fore, have historically tended to increase in the first fiscal quarter,
reflecting higher sales activity in the month of December. Additionally,
higher cardmember rewards expense is accrued in the first fiscal quar-
ter, reflecting seasonal growth in retail sales volume.
LIQUIDITY AND CAPITAL RESOURCES
The Balance Sheet
The Company’s total assets increased to $317.6 billion at November
30, 1998 from $302.3 billion at November 30, 1997, primarily
reflecting growth in cash and cash equivalents, cash and securities
deposited with clearing organizations or segregated under federal and
other regulations, and securities borrowed. A substantial portion of the
Company’s total assets consists of highly liquid marketable securities
and short-term receivables arising principally from securities transac-
tions. The highly liquid nature of these assets provides the Company
with flexibility in financing and managing its business.
Funding and Capital Policies
The Company’s senior management establishes the overall funding
and capital policies of the Company, reviews the Company’s perfor-
mance relative to these policies, monitors the availability of sources
of financing, reviews the foreign exchange risk of the Company, and
oversees the liquidity and interest rate sensitivity of the Company’s
asset and liability position. The primary goal of the Company’s fund-
ing and liquidity activities is to ensure adequate financing over a wide
range of potential credit ratings and market environments.
Many of the Company’s businesses are capital-inten-
sive. Capital is required to finance, among other things, the Company’s
securities inventories, underwriting, principal investments, private
equity activities, consumer loans and investments in fixed assets. As
a policy, the Company attempts to maintain sufficient capital and
funding sources in order to have the capacity to finance itself on a
fully collateralized basis at all times, including periods of financial
stress. Currently, the Company believes it has sufficient capital to meet
its needs. In addition, the Company attempts to maintain total
equity, on a consolidated basis, at least equal to the sum of all of its
subsidiaries’ equity. Subsidiary equity capital requirements are deter-
mined by regulatory requirements (if applicable), asset mix, leverage
considerations and earnings volatility.
The Company views return on equity to be an impor-
tant measure of its performance, in the context of both the partic-
ular business environment in which the Company is operating and
its peer group’s results. In this regard, the Company actively man-
ages its consolidated capital position based upon, among other