10-QPeriod: Q2 FY2008

MORGAN STANLEY Quarterly Report for Q2 Ended May 31, 2008

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

Summary

Morgan Stanley's Q2 2008 report (ending May 31, 2008) reveals a significant decline in net income, down 60% year-over-year to $1.026 billion, with diluted EPS at $0.95 compared to $2.45 in the prior year. This downturn is primarily attributed to challenging market conditions impacting the Institutional Securities segment, which saw net revenues drop 51% due to lower investment banking and sales & trading results, particularly in fixed income. While Global Wealth Management Group showed a revenue increase, largely due to a one-time gain from a divestiture, its core revenue growth was modest. Asset Management experienced a substantial loss before taxes. The company highlights gains from the secondary offering of MSCI Inc. and the sale of Morgan Stanley Wealth Management S.V. which partially offset the overall decline. Despite the revenue headwinds, the company managed to reduce non-interest expenses by 28% through lower compensation and benefits, reflecting lower incentive accruals. Total assets under management remained robust. The report also details significant exposures and losses related to the ongoing credit market crisis, particularly in mortgage-related products and corporate lending.

Financial Highlights

26 data points
Beta

Revenue

$6.11B

Net Income

$1.14B

18.7% Net Margin

EPS (Diluted)

$1.02

Cash & Equivalents

$62.76B

Free Cash Flow

$35.22B

Financial Statements
Beta
Revenue$6.11B
Operating Income$2.08B
Interest Expense$9.06B
Net Income$1.14B
EPS (Basic)$1.02
EPS (Diluted)$1.02
Shares Outstanding (Basic)1.04B
Shares Outstanding (Diluted)1.04B

Key Highlights

  • 1Net income decreased significantly by 60% year-over-year to $1.026 billion, with diluted EPS falling to $0.95 from $2.45.
  • 2Institutional Securities segment revenue dropped 51% to $3.625 billion due to weaker investment banking and sales & trading performance, particularly in fixed income.
  • 3Global Wealth Management Group reported a 48% increase in net revenues to $2.436 billion, boosted by a significant gain from the sale of MSWM S.V., though core revenue growth was only 4% excluding this gain.
  • 4Asset Management recorded a pre-tax loss of $227 million, a sharp decline from a pre-tax income of $303 million in the prior year, impacted by principal transaction losses.
  • 5Non-interest expenses decreased by 28% to $5.064 billion, driven by a 41% reduction in compensation and benefits expenses.
  • 6The company reported substantial losses and exposures related to credit market events, including significant writedowns in mortgage proprietary trading and losses from monoline insurer exposures.
  • 7Total liquidity significantly increased to $135 billion from $68 billion in the prior year, indicating a strong liquidity position.

Frequently Asked Questions

The primary driver was the severe decline in net revenues within the Institutional Securities segment, which fell by 51%. This was largely due to challenging market conditions, particularly the dislocation in fixed income sales and trading and corporate lending businesses, leading to lower results in investment banking and trading activities.

The Global Wealth Management Group saw a 48% increase in net revenues to $2.436 billion. This significant increase was substantially boosted by a pre-tax gain of $698 million related to the sale of Morgan Stanley Wealth Management S.V. Excluding this gain, core net revenues increased by a more modest 4%.

The company reported significant losses and exposures related to credit market events. This included approximately $400 million in mortgage proprietary trading net writedowns, $390 million in losses related to monoline exposures, and substantial losses in corporate lending activities, particularly 'event-driven' lending. The 'Impact of Credit Market Events' section details these exposures and their financial impact.

Morgan Stanley managed to reduce its non-interest expenses by 28% year-over-year, reaching $5.064 billion. This reduction was primarily driven by a 41% decrease in compensation and benefits expense, reflecting lower incentive-based compensation accruals due to lower net revenues.