10-QPeriod: Q2 FY2005

MORGAN STANLEY Quarterly Report for Q2 Ended May 31, 2005

Filed July 8, 2005For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley's (MS) Q2 2005 results show a decrease in net income and diluted EPS compared to the prior year, reflecting challenges in its Institutional Securities segment, particularly in fixed income sales and trading. While equity sales and trading remained stable, with a strong performance in prime brokerage, fixed income revenues were impacted by less favorable trading environments and lower volatility. The Individual Investor Group saw modest revenue growth driven by fee-based accounts, but commission revenues declined. Investment Management experienced a dip in pre-tax income due to lower investment gains, despite growth in assets under management. Credit Services showed a decline in pre-tax income, mainly due to lower servicing fees and higher expenses, though credit quality metrics improved. The company also highlighted a significant legal judgment in the Coleman litigation, with a substantial reserve set aside for potential appeal outcomes, which could materially impact future results.

Key Highlights

  • 1Net income for the quarter decreased by 24% year-over-year to $928 million, and diluted EPS fell by 22% to $0.86.
  • 2Institutional Securities segment income before taxes declined 27% year-over-year, driven by a 28% decrease in fixed income sales and trading revenues.
  • 3Individual Investor Group's pre-tax income decreased 11%, with commissions down 12% due to lower transaction volumes, although fee-based assets grew.
  • 4Investment Management pre-tax income fell 16% due to lower investment gains, but assets under management increased by 8%.
  • 5Credit Services pre-tax income decreased 19%, impacted by lower servicing fees and higher expenses, despite improved credit quality metrics.
  • 6The company recorded a $360 million reserve for the 'Coleman litigation', with a potential upper-end exposure exceeding $1.2 billion if the judgment is upheld on appeal.
  • 7Morgan Stanley announced its Board authorized management to pursue a spin-off of Discover Financial Services.

Frequently Asked Questions

The decline in net income was primarily driven by a significant decrease in the Institutional Securities segment's pre-tax income, largely due to weaker performance in fixed income sales and trading, as well as lower equity underwriting revenues. While other segments showed mixed results, the overall impact on the company's profitability was substantial.

Morgan Stanley has set aside a reserve of $360 million for the Coleman litigation, which it believes represents the low end of its probable exposure in the event the judgment is overturned on appeal and the case is remanded for a new trial. However, if the original judgment is upheld, the company could incur additional expenses exceeding $1.2 billion, which could materially adversely affect its financial condition and operating results.

Management anticipates that stable global economic conditions will continue, but noted that trading conditions remain mixed. They also expect that the typical summer slowdown in business activity within the Institutional Securities and Individual Investor Group segments could negatively impact third-quarter results.

Morgan Stanley announced that its Board of Directors has authorized management to pursue a spin-off of its Discover Financial Services business. This strategic move aims to enhance shareholder value and position Discover as a standalone public company.