10-QPeriod: Q2 FY2004

MORGAN STANLEY Quarterly Report for Q2 Ended May 31, 2004

Filed July 13, 2004For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley's second quarter of fiscal year 2004, ending May 31, 2004, demonstrated significant financial strength and growth. The company reported a substantial increase in net income and diluted earnings per share compared to the prior year's quarter, driven by strong performance across its business segments, particularly Institutional Securities. Net revenues saw a considerable rise, reflecting robust activity in investment banking and sales and trading. The company successfully managed its expenses, despite an increase reflecting higher compensation and benefits due to improved business performance, as well as higher costs associated with legal and regulatory matters. A notable event during the quarter was a pre-tax asset impairment charge related to the aircraft financing business, which had a moderating effect on overall profitability but was less severe than in the prior year. The company's diversified business model, robust capital position, and strategic initiatives position it well for continued growth, although it acknowledges mixed business and market trends heading into the second half of the fiscal year.

Key Highlights

  • 1Net income increased by 104% to $1.223 billion compared to the prior year's second quarter.
  • 2Diluted earnings per share rose by 100% to $1.10, up from $0.55 in the prior year's second quarter.
  • 3Net revenues increased by 32% to $6.7 billion, indicating strong business activity across segments.
  • 4The Institutional Securities segment showed a significant 184% increase in pre-tax income, driven by strong performance in investment banking and fixed income sales and trading.
  • 5The company reported a pre-tax asset impairment charge of $109 million related to its aircraft financing business.
  • 6Return on average common equity improved significantly to 18.4% from 10.6% in the prior year's second quarter.
  • 7Total client assets in the Individual Investor Group grew by 9% year-over-year to $579 billion.

Frequently Asked Questions

Morgan Stanley demonstrated strong financial performance in the second quarter of fiscal year 2004. Net income surged by 104% year-over-year to $1.223 billion, and diluted earnings per share doubled to $1.10. This growth was driven by a 32% increase in net revenues to $6.7 billion, largely due to robust performance in the Institutional Securities segment, particularly in investment banking and sales and trading activities.

The Institutional Securities segment was a key driver of growth, with pre-tax income increasing by 184% due to record revenues in fixed income and strong results in equities and investment banking. The Individual Investor Group also showed improvement, with pre-tax income more than doubling year-over-year. Investment Management pre-tax income rose by 71%, benefiting from increased assets under management and favorable asset mix. Credit Services experienced a slight decrease in revenue in the quarter but saw an increase in pre-tax income for the six-month period due to a lower provision for loan losses.

Yes, Morgan Stanley recorded a $109 million pre-tax asset impairment charge in the second quarter of fiscal year 2004 related to its aircraft financing business. While this charge reduced net income by $65 million and diluted earnings per share by $0.06, its impact was less significant than the $287 million charge recorded in the prior year's second quarter for a similar reason. Despite this charge, the company's overall profitability showed substantial improvement.

Looking ahead, Morgan Stanley anticipates mixed business and market trends. While global economic growth remains generally strong, concerns about inflationary pressures, rising oil prices, and geopolitical risks could impact the performance of its Institutional Securities, Individual Investor Group, and Investment Management segments. The company also expects typical summer slowdowns in some of these businesses. For Credit Services, loan balance growth and credit quality will remain key focuses, with marketing expenses expected to be higher in the latter half of the fiscal year.