01—Abstract
Summary
Summary of the 10-K filed February 20, 1998. Cited figures are marked; the original filing is the authoritative source.
Morgan Stanley, Dean Witter, Discover & Co. (the Company) reported fiscal 1997 (year ended November 30, 1997) as its first full year following the May 31, 1997 merger of Morgan Stanley Group and Dean Witter, Discover, accounted for as a pooling of interests.
Net income rose 31% to $2,586 milliona, primary EPS increased 32% to $4.25 (fully diluted $4.15), and return on average common equity was 22%. Total revenues reached $27.1 billion and net revenues $14.8 billion, with the Company's $1.6 trillion-plus merger and acquisition market participation driving record investment banking revenues of $2.7 billion. Results include $74 million ($63 million after tax) of pre-tax merger-related expenses.
The business is split into two segments. Securities and Asset Management delivered record net revenues of $11.9 billionb and net income of $2.2 billion, supported by assets under management or supervision of $338 billion and global assets under custody of $377 billion, the latter boosted by the April 1997 acquisition of Barclays' institutional global custody business. Credit and Transaction Services, anchored by the Discover Card and roughly 40 million general purpose card accounts, earned $468 million, up 8%, but faced rising credit losses: the owned consumer loan net charge-off rate climbed to 6.78% from 5.29%, and the provision for consumer loan losses rose 23% to $1.5 billion.
Management indicated it expects a higher charge-off rate in fiscal 1998. Balance sheet growth was substantial, with total assets increasing to $302.3 billionc from $238.9 billion, driven mainly by fixed income financing and repurchase activity.
Shareholders' equity grew to $14.0 billion and book value per share to $22.11d. The filing notes a $1.7 billion litigation-related risk profile across numerous matters (including NASDAQ antitrust, Orange County, and Sumitomo copper claims), but management states none is expected to have a material adverse effect on consolidated financial condition, though results in any given period could be affected.
02—Key points
Key Highlights
- Net income up 31% to $2,586 million; primary EPS of $4.25 (up 32%) and return on average common equity of 22%
- Total revenues of $27.1 billion and net revenues of $14.8 billion, both record levels for the combined company
- Securities and Asset Management: record net revenues of $11.9 billion and net income of $2.2 billion; $338 billion in client assets under management or supervision, up from $278 billion
- Credit and Transaction Services net income up 8% to $468 million, but owned consumer loan net charge-off rate rose to 6.78% from 5.29%, and management expects further pressure in fiscal 1998
- Total assets grew to $302.3 billion from $238.9 billion, reflecting expanded fixed income activity and repurchase agreements; book value per share rose to $22.11
- Derivative trading notional amounts reached $2.5 trillion (versus $1.3 trillion a year earlier), with $17.1 billion of credit exposure to counterparties
- Ongoing litigation includes NASDAQ antitrust matters (settlement agreed in principle), Orange County claims, and Sumitomo copper litigation, though management does not expect a material adverse effect on financial condition
03—Questions
Frequently Asked Questions
What drove the increase in Morgan Stanley Dean Witter's earnings in fiscal 1997?
Earnings growth was driven by a strong global merger and acquisition market, record investment banking revenues of $2.7 billion (up 23%), higher equity and foreign exchange trading revenues, and substantial growth in asset management fees, which rose 45% to $2.5 billion, partly aided by the VKAC and Barclays custody acquisitions. Incentive compensation rose in line with record results.
Is the rising credit card loss rate a concern for investors?
Yes, it is the main credit-quality concern in the filing. The owned consumer loan net charge-off rate increased to 6.78% from 5.29%, and the provision for consumer loan losses rose 23% to $1.5 billion. Management attributes the trend to higher consumer debt and bankruptcy levels across the industry, has tightened underwriting, and has said it expects a higher charge-off rate in fiscal 1998 before its credit measures take full effect.
How significant was the 1997 merger for the company's results?
The merger of Morgan Stanley Group into Dean Witter, Discover was accounted for as a pooling of interests, so all prior periods were restated as if the companies had always been combined. Morgan Stanley shareholders received 1.65 shares for each share held. Merger-related costs totaled $74 million pre-tax ($63 million after tax), recorded in the second fiscal quarter of 1997. The company also changed its fiscal year-end to November 30.
What are the main litigation risks disclosed in the filing?
The filing lists numerous matters, including the NASDAQ market-maker antitrust litigation (settlement reached in principle in December 1997), a Department of Justice NASDAQ investigation, the Orange County bankruptcy-related suit, term trust and TNORA fund class actions, the Global Opportunity Fund claim in Luxembourg seeking $44 million, and the Sumitomo copper manipulation suit. The company states that these are not expected to have a material adverse effect on its consolidated financial condition, though they could affect results in a particular period.
How much leverage and derivative exposure does the company carry?
The balance sheet grew to $302.3 billion, supported largely by repurchase agreements ($111.7 billion) and reverse repurchase agreements ($84.5 billion). Derivative contracts had gross notional amounts of $2.5 trillion, with fair value of $17.1 billion in assets and $15.6 billion in liabilities. Approximately $14.2 billion of the $17.1 billion credit exposure was with counterparties rated single-A or better. The company's one-day 99% Value-at-Risk was $39 million at year-end.
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