10-QPeriod: Q1 FY2008

MORGAN STANLEY Quarterly Report for Q1 Ended Feb 29, 2008

Filed April 9, 2008For Securities:MSMS-PKMS-POMS-PQMS-PAMS-PFMS-PIMS-PLMS-PPMS-PEMSTLW

Summary

Morgan Stanley's Q1 2008 results show a significant year-over-year decline in net income and earnings per share, largely attributed to challenging market conditions, particularly within its Institutional Securities segment. While equity trading revenues reached a record high, this was offset by substantial writedowns in mortgage-related proprietary trading products and other credit market exposures. The company experienced a notable decrease in net revenues and income from continuing operations. Despite the headwinds, the Global Wealth Management Group demonstrated resilience with increased income and client assets. However, the Asset Management segment reported a loss, impacted by investment losses and structured investment vehicle exposures. The company's liquidity and capital position remain robust, bolstered by a significant investment from China Investment Corporation. Management has implemented cost-saving measures, including staff reductions, to mitigate the impact of the market downturn.

Key Highlights

  • 1Net income decreased by 42% to $1.551 billion compared to the prior year period, reflecting a challenging market environment.
  • 2Diluted earnings per share fell to $1.45 from $2.51 in the prior year, driven by lower revenues and increased writedowns.
  • 3Institutional Securities segment net revenues declined 13% to $6.213 billion, with fixed income trading and underwriting negatively impacted, although equity trading set a record.
  • 4The company recorded significant writedowns, including approximately $1.2 billion in mortgage proprietary trading and $910 million related to 'event-driven' lending, highlighting exposure to credit market events.
  • 5Global Wealth Management Group saw a 12% increase in income from continuing operations to $254 million, supported by higher net interest revenues and client activity.
  • 6Asset Management reported a pre-tax loss of $161 million, a significant drop from the prior year's income, due to investment losses and structured investment vehicle exposures.
  • 7The company strengthened its capital position, notably with a $5.579 billion investment from China Investment Corporation in December 2007.

Frequently Asked Questions

The primary drivers for the decline in net income were challenging market conditions, particularly within the Institutional Securities segment. This included significant writedowns on mortgage-related proprietary trading products and other credit exposures, which negatively impacted results despite record equity trading revenues. Lower revenues from fixed income trading and underwriting also contributed to the overall decline.

The Global Wealth Management Group showed a more resilient performance, with income from continuing operations increasing by 12% year-over-year. This growth was supported by higher net interest revenues from the bank deposit program and increased client activity. Client assets also saw an increase.

Morgan Stanley has subprime mortgage-related trading exposures, including investments in ABS CDOs and other mortgage-backed securities and derivatives. As of February 29, 2008, the company reported a total U.S. subprime trading exposure of $7.6 billion. These positions are carried at fair value, and recent market deterioration has led to significant valuation declines and recognition of losses.

Yes, Morgan Stanley has implemented cost-saving measures. This includes severance expenses of approximately $161 million related to staff reductions, and a 15% decrease in compensation and benefits expenses, primarily due to lower incentive-based compensation accruals reflecting the lower net revenues.