10-QPeriod: Q2 FY2006

MORGAN STANLEY Quarterly Report for Q2 Ended May 31, 2006

Filed July 7, 2006For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley reported strong financial results for the quarter ended May 31, 2006, with net income rising 111% year-over-year to $1.96 billion and net revenues increasing 48% to $8.94 billion. This robust performance was driven by significant growth across its business segments, particularly Institutional Securities, which saw a 71% surge in net revenues to $5.73 billion, fueled by strong fixed income and equity sales and trading, as well as investment banking activities. The company's Discover segment also delivered record income, up 106%, benefiting from lower provisions for consumer loan losses and increased servicing and securitization income. Global Wealth Management and Asset Management also showed solid revenue growth, indicating broad-based strength in the company's diversified financial services model. Despite increased non-interest expenses, largely attributed to higher compensation costs associated with strong revenue performance, Morgan Stanley demonstrated improved operational efficiency, with a significant increase in its annualized return on average common equity to 25.1%.

Key Highlights

  • 1Net income increased by 111% to $1.96 billion for the quarter ended May 31, 2006, compared to the prior year period.
  • 2Net revenues grew by 48% to a record $8.94 billion, driven by broad-based strength across all business segments.
  • 3Institutional Securities segment net revenues surged 71% to $5.73 billion, led by strong performance in fixed income and equity sales and trading and investment banking.
  • 4Discover segment reported record income, up 106% year-over-year, supported by lower consumer loan loss provisions and increased securitization income.
  • 5Annualized return on average common equity significantly improved to 25.1%, reflecting the strong earnings performance.
  • 6Total assets grew to $1.03 trillion, with increases driven by financial instruments owned and customer receivables, indicating expanded business activity.

Frequently Asked Questions

The significant increase in profitability was primarily driven by a surge in net revenues across all segments, especially within Institutional Securities, which benefited from near-record fixed income and equity sales and trading revenues, along with robust investment banking activity. Discover also contributed strongly with record income due to improved credit quality and securitization performance.

Institutional Securities saw the largest revenue growth at 71%, driven by trading and investment banking. Global Wealth Management Group's income increased 33% due to higher net interest and commission revenues. Asset Management's income rose 28%, primarily from higher private equity revenues. Discover delivered a 106% increase in income, largely due to a lower provision for consumer loan losses and strong securitization income.

Morgan Stanley anticipates continued strong investment banking activity but notes a slight weakening in global financial market conditions compared to the first half of the year. The company expects consumer loan charge-offs in the Discover segment to rise from current low levels but remain below 5% on a managed basis as bankruptcies normalize.

Yes, the report mentions the ongoing Coleman litigation, where Morgan Stanley is appealing a substantial jury verdict. The company has reserved $360 million, but additional expenses could exceed $1.2 billion if the appeal is unsuccessful in reversing the judgment. Other legal matters, including IPO allocation issues and employment litigation, are also noted, but the company believes their outcomes, except potentially Coleman, will not materially adversely affect its financial condition.