10-QPeriod: Q1 FY2005

MORGAN STANLEY Quarterly Report for Q1 Ended Feb 28, 2005

Filed April 6, 2005For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley's Q1 2005 results showed a notable increase in net income, reaching $1.402 billion, a 14% rise year-over-year, with diluted EPS growing 16% to $1.29. This performance was driven by robust net revenues of $6.846 billion, up 10% from the prior year, bolstered by record fixed income sales and trading, and strong equity sales and trading, alongside growth in asset management fees. The company also benefited from a $251 million insurance settlement related to 9/11, which offset significant non-interest expenses, including $360 million for the Coleman litigation. Despite operational strengths, the company is navigating challenges including a $360 million legal charge related to the Coleman litigation and a $109 million lease accounting adjustment. Looking ahead, Morgan Stanley announced plans to explore a spin-off of its Discover Financial Services business to enhance shareholder value and focus on its core securities operations. This strategic move signals a significant shift in the company's structure and priorities.

Key Highlights

  • 1Net income increased by 14% to $1.402 billion for the three months ended February 28, 2005.
  • 2Diluted earnings per share rose by 16% to $1.29 for the same period.
  • 3Net revenues grew by 10% to $6.846 billion, driven by strong performance in fixed income and equity sales and trading.
  • 4The company received a $251 million pre-tax gain from an insurance settlement related to the September 11, 2001, terrorist attacks.
  • 5Non-interest expenses increased by 10%, impacted by a $360 million charge for the Coleman litigation and a $109 million lease accounting adjustment.
  • 6Morgan Stanley announced its board authorized management to pursue a spin-off of Discover Financial Services.
  • 7Total assets increased by approximately 7.6% to $802.2 billion as of February 28, 2005, compared to November 30, 2004.

Frequently Asked Questions

Revenue growth was primarily driven by record fixed income sales and trading revenues, higher equity sales and trading revenues, and an increase in asset management, distribution, and administration fees. The Institutional Securities segment, in particular, saw significant contributions from these areas.

The most significant litigation impacting the results is the 'Coleman (Parent) Holdings, Inc. v. Morgan Stanley & Co., Inc.' case. Morgan Stanley recorded a $360 million charge related to this matter in the first quarter of fiscal 2005. The company is contesting liability, and trial began in April 2005.

The planned spin-off of Discover Financial Services is intended to maximize shareholder value in the Discover Card division and allow Morgan Stanley to further focus on its integrated securities businesses, which are seen as offering higher return growth opportunities. This strategic move indicates a refocusing of the company's core operations.

Total assets increased by approximately 7.6% to $802.2 billion as of February 28, 2005, compared to $745.5 billion at November 30, 2004. This increase was primarily driven by higher securities purchased under agreements to resell, increased financial instruments owned, and greater receivables from customers, reflecting growth in financing activities.