10-QPeriod: Q3 FY2005

MORGAN STANLEY Quarterly Report for Q3 Ended Aug 31, 2005

Filed October 7, 2005For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley's third quarter 2005 results showed robust growth in its Institutional Securities segment, driven by strong performances in fixed income and equity sales and trading, as well as investment banking activities. The company reported a significant increase in net revenues year-over-year, largely attributable to higher trading revenues and advisory fees. While the Retail Brokerage segment experienced a modest increase in pre-tax income, it was impacted by higher legal and regulatory costs. The Asset Management segment saw a decrease in pre-tax income, primarily due to lower gains from private equity investments. The Discover segment reported a decrease in pre-tax income, impacted by higher non-interest expenses related to the PULSE acquisition and increased operating costs. The company also announced a significant charge related to the planned sale of its aircraft leasing business, classifying it as discontinued operations. Overall, the results highlight Morgan Stanley's continued strength in its core institutional businesses, while also signaling challenges and investments in its retail and consumer finance operations. The company's proactive management of its financial condition and capital resources remains a key focus amidst evolving market conditions and ongoing regulatory scrutiny.

Key Highlights

  • 1Net revenues increased by 29% to $6.9 billion in the third quarter of fiscal 2005 compared to the prior year, driven by a strong performance in the Institutional Securities segment.
  • 2Income from continuing operations increased by 36% to $1.166 billion, with diluted EPS from continuing operations at $1.09.
  • 3Institutional Securities segment saw a 91% increase in income from continuing operations before taxes, with net revenues up 51% due to strong fixed income and equity trading and investment banking.
  • 4A significant after-tax charge of approximately $1.0 billion was recognized for discontinued operations related to the planned sale of the aircraft leasing business.
  • 5Retail Brokerage segment's pre-tax income increased 36%, but was impacted by higher legal and regulatory costs and a reduction in global representatives.
  • 6Discover segment's pre-tax income decreased 28% due to higher non-interest expenses, despite growth in net revenues.
  • 7The company repurchased approximately $2.5 billion of its common stock during the nine-month period ended August 31, 2005.

Frequently Asked Questions

Morgan Stanley reported a net income of $144 million, or $0.13 per diluted share, for the quarter ended August 31, 2005. This represents a significant decrease from the previous year, largely due to a substantial after-tax charge of $1.0 billion related to the planned sale of its aircraft leasing business. However, income from continuing operations showed strong growth, increasing by 36% to $1.166 billion, with diluted EPS from continuing operations at $1.09.

The Institutional Securities segment was the standout performer, with income from continuing operations increasing 91% and net revenues up 51%, driven by robust trading and investment banking activity. Retail Brokerage showed modest growth in pre-tax income but faced increased legal and regulatory costs. The Discover segment experienced a decline in pre-tax income due to higher expenses. Asset Management's pre-tax income also decreased, primarily due to lower gains from private equity investments.

The most significant event was a charge of approximately $1.0 billion (after tax) related to the aircraft leasing business, which has been classified as discontinued operations due to the planned sale. Additionally, the company incurred charges related to senior management severance and new hires, and faced elevated legal and regulatory costs in its Retail Brokerage segment.

Morgan Stanley continued to manage its capital through share repurchases, buying back approximately $2.5 billion of its common stock in the nine-month period. The company maintained its focus on liquidity management with a framework designed to ensure adequate financing through various market conditions. Credit ratings remained a key focus, with the company closely monitoring its standing with rating agencies.