Optimism, Barbs from Morgan Stanley Head

Article excerpt

Strong results by Discover Financial Services last year helped buffer setbacks in other operations of its parent company, Morgan Stanley Dean Witter & Co., but the company's chief warns that "challenges present themselves" this year.

In doing so, he aimed a few barbs at his competitors in the card market while being cagey about the outlook for his own.

Morgan Stanley's earnings last year declined 34%, but its credit card business performed better than the company's other segments -- it posted a drop of only 3%.

Last year Morgan Stanley faced "a decline in credit quality that always accompanies recession," Philip Purcell, its chairman and chief executive officer, told investors last week at a conference sponsored by Citigroup Inc.'s Salomon Smith Barney.

In spite of various economic problems -- ranging from a 60% drop in initial public offerings to a downturn in travel that hurt the company's aircraft leasing service -- "we are pleased with our return on equity of 19%," he said. "During a recession, that is a very good performance indeed."

Mr. Purcell expressed some optimism for Morgan Stanley's performance this year, especially for its retail investment and Discover Financial Services businesses.

He said he was not making any projections about chargeoffs for Discover this year, but he noted that the number of bankruptcies have been rising. "The trends are increased delinquency, increased writeoffs, which puts pressure on margins. You can take some pricing actions and expense actions to try to offset it, which is what we are doing."

This year Discover will try to equal Visa and MasterCard in terms of merchant acceptance, Mr. Purcell said. The card division has worked on closing its lag behind the two industry giants for several years, since the days when it acquired its own merchants and shunned third-party acquirers, he said.

"We have narrowed the gap, and parity with Tweedledee and Tweedledum is now in sight," he said.

Discover also is devoting extra attention to Internet merchants, where it aims to become the leading credit card, Mr. …