EX-99.1 3 a5427779ex991.htm EXHIBIT 99.1 a5427779ex991.htm
Exhibit 99.1
 
   
Contact:
Media Relations
Jeanmarie McFadden
212-762-6901
Investor Relations
William Pike
212-761-0008
 
 

Morgan Stanley Reports Record Second Quarter Results

Record Quarterly EPS from Continuing Operations of $2.45, Up 41%
Record Quarterly Net Revenues of $11.5 Billion, Up 32%
Record Quarterly Income from Continuing Operations of $2.6 Billion, Up 41%
Record Net Revenues, Net Income and EPS for First Six Months of FY07
 
NEW YORK, June 20, 2007 - Morgan Stanley (NYSE: MS) today reported record income from continuing operations for the second quarter ended May 31, 2007 of $2,582 million, an increase of 41 percent from $1,828 million in the second quarter of 2006.  Diluted earnings per share from continuing operations were a record $2.45 compared with $1.74 a year ago.  Net revenues were a record $11.5 billion, 32 percent above last year's second quarter.  Non-interest expenses of $7.6 billion increased 31 percent from last year.  The annualized return on average common equity from continuing operations was 27.5 percent in the current quarter, compared with 23.7 percent in the second quarter of 2006.

For the first six months of 2007, income from continuing operations was a record $5,141 million, a 50 percent increase from $3,430 million a year ago.  Diluted earnings per share from continuing operations were a record $4.86 compared with $3.25 last year.  Net revenues rose 31 percent to a record $22.5 billion and non-interest expenses increased 24 percent to $14.8 billion.  The annualized return on average common equity from continuing operations was 28.2 percent, compared with 22.8 percent a year ago.

Net income for the quarter was $2,582 million, an increase of 40 percent from $1,841 million in the second quarter of 2006.  For the first six months of 2007, net income was a record $5,254 million, a 54 percent increase from $3,415 million a year ago.  Diluted earnings per share were $2.45 for the quarter, compared with $1.75 in the second quarter of 2006, and the annualized return on average common equity for the second quarter was 27.5 percent compared with 23.7 percent a year ago.  For the first six months, diluted earnings per share were a record $4.96, compared with $3.23 a year ago, and the annualized return on average common equity was 28.7 percent compared with 22.5 percent last year.
 
 
Business Highlights
 
·
Institutional Securities achieved record net revenues of $7.4 billion, up 39 percent from last year.  Pre-tax income rose 55 percent to a record $3.0 billion.
·
Investment Banking achieved record results, with revenues of $1.7 billion, a 65 percent increase from the second quarter of 2006.  Advisory revenues and underwriting revenues both reached record highs.
·
Equity sales and trading delivered record revenues of $2.2 billion, up 33 percent from last year, reflecting record results in Prime Brokerage and Derivatives.
·
Fixed income sales and trading revenues increased 34 percent to $2.9 billion, the second-best quarter ever in this business.
·
Global Wealth Management delivered its fifth consecutive quarter of improved performance and achieved a pre-tax margin of 16 percent.  Client assets per global representative and financial advisor productivity reached all-time highs, and the Firm increased the number of global representatives to 8,137.
·
Asset Management recorded net customer inflows of $9.3 billion - more than double the prior quarter.  Assets under management reached $560 billion at quarter-end, a 23 percent increase from a year ago.
·
Discover continues to be well positioned for success as a stand-alone company, and delivered its sixth consecutive quarter of receivables growth due to increased net sales volume and stable payment rates.  The spin-off of Discover remains on track and is scheduled to occur on June 30, 2007.
 
John J. Mack, Chairman and CEO, said, "Morgan Stanley delivered record revenues and earnings in the second quarter and the first half of the year, as we continued to build momentum across our securities businesses and continued to see the benefits of our diverse mix of products, clients and businesses around the globe.  Thanks to the commitment and focus of our people, we've now achieved seven straight quarters with ROE above 20 percent, and we're well on our way to reaching our goal of doubling 2005 earnings over five years.  But we believe there is still work that remains to be done, and we remain intensely focused on delivering value to Morgan Stanley's clients and shareholders over the long term."
2
INSTITUTIONAL SECURITIES 1
 
Institutional Securities posted record pre-tax income2 of $3.0 billion, up 55 percent from $1.9 billion in the second quarter of 2006.  Record net revenues of $7.4 billion were 39 percent higher, driven by strong results across all businesses.  The quarter’s pre-tax margin was 40 percent, compared with 36 percent in last year’s second quarter.  The quarter’s return on average common equity was 35 percent compared with 28 percent a year ago.
 
·
Advisory revenues were a record $725 million, a 99 percent increase from last year’s second quarter.
·
Record underwriting revenues of $979 million increased 46 percent from last year’s second quarter.  Fixed income underwriting revenues were a record $486 million, a 63 percent increase from the prior year’s second quarter and equity underwriting revenues increased 33 percent to $493 million over the same period.
·
Fixed income sales and trading net revenues were $2.9 billion, a 34 percent increase over the second quarter of 2006.  The increase was driven by strong results in interest rate & currency and credit products, partly offset by lower results in commodities.  Interest rate & currency products benefited from record revenues in emerging markets and higher results in interest rate trading.  Credit products had strong results, with higher client activity and trading revenues driven by corporate credit and structured products.  These were offset by lower securitized products revenues, primarily in residential mortgage securities.  Commodities revenues were down slightly from last year’s second quarter with lower revenues in electricity and natural gas.
·
Equity sales and trading net revenues were a record $2.2 billion, an increase of 33 percent from last year’s second quarter.  Favorable global market conditions and increased client flows in all regions across cash, derivatives and financing markets drove revenues higher.  Prime Brokerage financed higher client balances for the 17th consecutive quarter, which contributed to record revenues for the business.
·
Investment revenues were $396 million compared with $389 million in the second quarter of last year.
·
The Company’s aggregate average trading VaR measured at the 95 percent confidence level was $81 million compared with $63 million for the second quarter of 2006 and $90 million for the first quarter of 2007.  Total aggregate average trading and non-trading VaR was $87 million compared with $70 million for the second quarter of 2006 and $92 million for the first quarter of 2007.  At quarter end, the Company’s aggregate trading VaR was $86 million, and the aggregate trading and non-trading VaR was $93 million.
 
3
 
·
Non-interest expenses were $4.4 billion, an increase of 30 percent from the second quarter of last year.  Compensation costs were higher compared with a year ago resulting from higher revenues and non-compensation expenses increased as a result of higher levels of business activity and business investment.
 
For the first five months of calendar 2007, the Company ranked first in global completed M&A with a 38 percent market share, second in global announced M&A with a 33 percent market share, third in global IPOs with an 8 percent market share, fifth in global equity and equity-related issuances with an 8 percent market share and fifth in global debt issuance with a 6 percent market share.3

GLOBAL WEALTH MANAGEMENT GROUP
 
Global Wealth Management Group's pre-tax income for the second quarter was $269 million, a 67 percent increase from $161 million in the second quarter of last year.  The quarter's pre-tax margin was 16 percent compared with 12 percent in last year's second quarter.  The quarter's return on average common equity was 41 percent compared with 14 percent a year ago, reflecting lower capital allocated to the business and the increase in net income.
 
·
Net revenues of $1.6 billion were up 17 percent from a year ago reflecting stronger transactional revenues due to increased underwriting activity, higher asset management revenues resulting from growth in fee-based products and higher net interest revenue from growth in the bank deposit sweep program.
·
Non-interest expenses were $1.4 billion, up 11 percent from a year ago.  Compensation costs increased from a year ago, primarily reflecting higher revenues and investment in the business.  Non-compensation expenses declined from a year ago primarily reflecting lower charges for legal and regulatory matters.
·
Total client assets were $728 billion, a 16 percent increase from last year’s second quarter.  Client assets in fee-based accounts rose 17 percent to $210 billion over the last 12 months and represent 29 percent of total assets.
·
The 8,137 global representatives at quarter-end achieved record average annualized revenue and total client assets per global representative of $814,000 and $89 million, respectively.
 
4
ASSET MANAGEMENT1
 
Asset Management reported pre-tax income for the second quarter of $306 million, 16 percent higher than last year's $264 million.  The quarter’s pre-tax margin was 20 percent compared with 29 percent a year ago and the return on average common equity was 23 percent compared with 28 percent in last year’s second quarter.  The decline in the pre-tax margin and return on average common equity primarily reflects the continued investment in the business.
 
·
Net revenues increased 68 percent to a record $1,509 million primarily reflecting investment gains from the real estate, private equity and alternatives businesses.  The increase was also driven by investment revenues associated with employee deferred compensation and co-investment plans that are essentially offset by compensation expense related to these plans.4  Management and administration fees were also higher due to an increase in assets under management and higher performance fees from the alternatives business, including FrontPoint Partners.
·
Non-interest expenses increased 90 percent to $1,203 million driven by higher compensation costs4 resulting from increased revenues and investment in the private equity and alternatives businesses.  Non-compensation expenses increased from last year resulting from higher levels of business activity and business investment.
·
Asset Management recorded net customer inflows of $9.3 billion for the quarter, which represented the third consecutive quarter of positive flows.  The quarter reflected positive long-term flows across most distribution channels and continued strong flows into institutional money markets.  This compared with $5.1 billion of net outflows a year ago and is more than double the flows recorded in the first quarter of this year.
·
Assets under management or supervision at May 31, 2007 were $560 billion, up $106 billion, or 23 percent, from a year ago, driven by increases in equity, alternative and institutional money market asset classes.  These increases primarily resulted from market appreciation and net customer inflows.
·
The percent of the Company’s long-term fund assets performing in the top half of the Lipper rankings was 52 percent over one year, 60 percent over three years, 74 percent over five years and 81 percent over 10 years.
 
 
5
DISCOVER
 
Discover’s second quarter pre-tax income was $333 million on a managed basis, a 38 percent decline compared with $541 million in last year’s record second quarter.  Net revenues of $1,035 million were 13 percent lower than a year ago, which included a favorable impact following changes in federal bankruptcy legislation in 2005.  The quarter’s pre-tax margin was 32 percent compared with 45 percent a year ago.  The quarter’s return on average common equity was 16 percent compared with 27 percent a year ago.
 
·
Transaction volume increased 5 percent from a year ago to $29.9 billion, primarily driven by higher sales volume.
·
Managed credit card loans of $51.3 billion were up 6 percent from a year ago and increased 1 percent from the end of the first quarter.
·
Managed merchant, cardmember and other fees were $551 million, 2 percent higher than last year’s second quarter.  Higher merchant discount revenues driven by higher sales activity were partly offset by lower late and overlimit fee revenues.
·
The provision for consumer loan losses on a managed basis was $531 million, up 43 percent from last year, reflecting a continued trend toward more normalized bankruptcy charge-offs in the domestic portfolio and increased credit losses in the U.K.
·
Managed net interest income of $970 million decreased $30 million, or 3 percent, reflecting a narrowing of the interest rate spread resulting from a higher cost of funds and a lower yield, partly offset by a 7 percent increase in average credit card loans.
·
Non-interest expenses increased 8 percent to $702 million, primarily due to higher professional fees, which were primarily related to consulting costs associated with the spin-off and increased legal fees related to the VISA/MasterCard litigation.
·
The managed credit card net charge-off rate was 4.24 percent, 94 basis points higher than last year's second quarter.  The managed credit card over-30-day delinquency rate was 3.13 percent, 16 basis points lower than the second quarter of 2006, and the over-90-day delinquency rate was 1.52 percent, 1 basis point below the same period of last year.
 
OTHER MATTERS
 
The Company previously announced that its Board of Directors approved the spin-off of Discover Financial Services (“DFS”).  The distribution of all of the outstanding shares of DFS common stock will be made on June 30, 2007 to Morgan Stanley shareholders of record as of the close of business on June 18, 2007.  Morgan Stanley will distribute one share of DFS common stock for every two shares of Morgan Stanley common stock outstanding on the record date.  Upon the spin-off, the results of DFS for all prior periods will be reported in discontinued operations on an after-tax basis.
6
 
As of May 31, 2007, the Company repurchased approximately 33 million shares of its common stock since the end of fiscal 2006.

The Company announced that its Board of Directors declared a $0.27 quarterly dividend per common share.  The dividend is payable on July 31, 2007, to common shareholders of record on July 13, 2007.  The Company also announced that its Board of Directors declared a quarterly dividend of $382.68 per share of Series A Floating Rate Non-Cumulative Preferred Stock (represented by depositary shares, each representing 1/1,000th interest in a share of preferred stock and each having a dividend of $0.38268) to be paid on July 16, 2007 to preferred shareholders of record on July 1, 2007.

Total capital as of May 31, 2007 was $187.3 billion, including $44.4 billion of common shareholders' equity, preferred equity and junior subordinated debt issued to capital trusts.  Book value per common share was $36.52, based on 1.1 billion shares outstanding.

Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management, wealth management and credit services.  The Company's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 32 countries.  For further information about Morgan Stanley, please visit www.morganstanley.com.

A financial summary follows.  Financial, statistical and business-related information, as well as information regarding business and segment trends, is included in the Financial Supplement.  Both the earnings release and the Financial Supplement are available online in the Investor Relations section at www.morganstanley.com.

# # #

(See Attached Schedules)

The information above contains forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management’s current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially.  For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain Factors Affecting Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2006 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” in the Company’s Quarterly Reports on Forms 10-Q and other items throughout the Form 10-K, Forms 10-Q and the Company’s Current Reports on Form 8-K.
7
 
MORGAN STANLEY
Quarterly Financial Summary (1)
(unaudited, dollars in millions)
 
   
Quarter Ended
    
Percentage Change From:
    
Six Months Ended
    
Percentage
  
   
May 31,
2007
    
May 31,
2006
    
Feb 28,
2007
    
May 31,
2006
    
Feb 28,
2007
    
May 31,
2007
    
May 31,
2006
    
Change
  
Net revenues
                                                
Institutional Securities
   $
7,393
     $
5,305
     $
7,124
       39 %     4 %   $
14,517
     $
10,742
       35 %
Global Wealth Management Group
    
1,642
      
1,400
      
1,511
       17 %     9 %    
3,153
      
2,689
       17 %
Asset Management
    
1,509
      
898
      
1,368
       68 %     10 %    
2,877
      
1,635
       76 %
Discover
    
1,035
      
1,191
      
1,025
       (13 %)     1 %    
2,060
      
2,280
       (10 %)
Intersegment Eliminations
     (56 )     (90 )     (47 )     38 %     (19 %)     (103 )     (139 )     26 %
Consolidated net revenues
   $
11,523
     $
8,704
     $
10,981
       32 %     5 %   $
22,504
     $
17,207
       31 %
                                                                 
Income before taxes (2)
                                                                
Institutional Securities
   $
2,965
     $
1,910
     $
2,860
       55 %     4 %   $
5,825
     $
3,631
       60 %
Global Wealth Management Group
    
269
      
161
      
229
       67 %     17 %    
498
      
185
       169 %
Asset Management
    
306
      
264
      
381
       16 %     (20 %)    
687
      
432
       59 %
Discover
    
333
      
541
      
372
       (38 %)     (10 %)    
705
      
1,020
       (31 %)
Intersegment Eliminations
    
1
       (13 )    
5
       108 %     (80 %)    
6
      
6
      
--
  
Consolidated income before taxes
   $
3,874
     $
2,863
     $
3,847
       35 %     1 %   $
7,721
     $
5,274
       46 %
                                                                 
                                                                 
Earnings per basic share:
                                                                
Income from continuing operations
   $
2.57
     $
1.81
     $
2.52
       42 %     2 %   $
5.09
     $
3.37
       51 %
Discontinued operations
   $
-
     $
0.01
     $
0.11
      
*
      
*
     $
0.12
     $ (0.01 )    
*
  
Earnings per basic share
   $
2.57
     $
1.82
     $
2.63
       41 %     (2 %)   $
5.21
     $
3.36
       55 %
                                                                 
Earnings per diluted share:
                                                                
Income from continuing operations
   $
2.45
     $
1.74
     $
2.40
       41 %     2 %   $
4.86
     $
3.25
       50 %
Discontinued operations
   $
-
     $
0.01
     $
0.11
      
*
      
*
     $
0.10
     $ (0.02 )    
*
  
Earnings per diluted share
   $
2.45
     $
1.75
     $
2.51
       40 %     (2 %)   $
4.96
     $
3.23
       54 %
                                                                 
Average common shares outstanding
                                                                
Basic
    
996,544,761
      
1,013,241,715
      
1,009,186,993
                      
1,002,894,369
      
1,016,756,096
          
Diluted
    
1,045,643,087
      
1,054,733,745
      
1,057,912,545
                      
1,051,684,753
      
1,056,493,761
          
Period end common shares outstanding
    
1,051,690,047
      
1,071,786,172
      
1,061,644,077
                      
1,051,690,047
      
1,071,786,172
          
                                                                 
Return on average common equity
                                                                
from continuing operations
     27.5 %     23.7 %     28.8 %                     28.2 %     22.8 %        
Return on average common equity
     27.5 %     23.7 %     29.9 %                     28.7 %     22.5 %        
 
(1)
All periods have been restated to reflect the transfer of the real estate investing business from Institutional Securities to Asset Management.
 
Real estate advisory and certain passive limited partnership interests remain in Institutional Securities.
(2)
Represents consolidated income from continuing operations before gain/(loss) from unconsolidated investees, taxes
 
and gain/(loss) from discontinued operations.
Note:
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
8
 
MORGAN STANLEY
Quarterly Consolidated Income Statement Information
(unaudited, dollars in millions)
 
    
Quarter Ended
    
Percentage Change From:
    
Six Months Ended
    
Percentage
  
    
May 31,
2007
    
May 31,
2006
    
Feb 28,
2007
    
May 31,
2006
    
Feb 28,
2007
    
May 31,
2007
    
May 31,
2006
    
Change
  
                                                  
Investment banking
   $
1,913
     $
1,132
     $
1,227
       69 %     56 %   $
3,140
     $
2,114
       49 %
Principal transactions:
                                                                
Trading
    
4,838
      
3,559
      
4,158
       36 %     16 %    
8,996
      
6,645
       35 %
Investments
    
1,004
      
629
      
880
       60 %     14 %    
1,884
      
929
       103 %
Commissions
    
1,123
      
994
      
1,005
       13 %     12 %    
2,128
      
1,914
       11 %
Fees: 
                                                                
Asset management, distribution and admin.
    
1,596
      
1,321
      
1,479
       21 %     8 %    
3,075
      
2,589
       19 %
Merchant, cardmember and other
    
261
      
277
      
297
       (6 %)     (12 %)    
558
      
566
       (1 %)
Servicing and securitizations income
    
643
      
651
      
556
       (1 %)     16 %    
1,199
      
1,247
       (4 %)
Interest and dividends
    
16,066
      
10,111
      
14,814
       59 %     8 %    
30,880
      
20,655
       50 %
Other 
    
290
      
125
      
245
       132 %     18 %    
535
      
259
       107 %
Total revenues
    
27,734
      
18,799
      
24,661
       48 %     12 %    
52,395
      
36,918
       42 %
Interest expense
    
16,007
      
9,965
      
13,485
       61 %     19 %    
29,492
      
19,426
       52 %
Provision for consumer loan losses
    
204
      
130
      
195
       57 %     5 %    
399
      
285
       40 %
Net revenues
    
11,523
      
8,704
      
10,981
       32 %     5 %    
22,504
      
17,207
       31 %
                                                                  
Compensation and benefits
    
5,218
      
3,802
      
4,992
       37 %     5 %    
10,210
      
8,044
       27 %
Occupancy and equipment
    
301
      
236
      
280
       28 %     8 %    
581
      
466
       25 %
Brokerage, clearing and exchange fees
    
366
      
340
      
361
       8 %     1 %    
727
      
632
       15 %
Information processing and communications
    
381
      
364
      
369
       5 %     3 %    
750
      
710
       6 %
Marketing and business development
    
340
      
297
      
294
       14 %     16 %    
634
      
535
       19 %
Professional services
    
626
      
537
      
499
       17 %     25 %    
1,125
      
970
       16 %
Other 
    
417
      
265
      
339
       57 %     23 %    
756
      
576
       31 %
Total non-interest expenses
    
7,649
      
5,841
      
7,134
       31 %     7 %    
14,783
      
11,933
       24 %
                                                                  
Income from continuing operations before gain/(loss)
                                                                
from unconsolidated investees and taxes
    
3,874
      
2,863
      
3,847
       35 %     1 %    
7,721
      
5,274
       46 %
Gain/(loss) from unconsolidated investees
     (21 )    
23
       (27 )     (191 %)     22 %     (48 )    
3
      
*
  
Provision for income taxes
    
1,271
      
1,058
      
1,261
       20 %     1 %    
2,532
      
1,847
       37 %
Income from continuing operations
    
2,582
      
1,828
      
2,559
       41 %     1 %    
5,141
      
3,430
       50 %
Discontinued operations (1)
                                                                
Gain/(loss) from discontinued operations
    
0
      
21
      
174
      
*
      
*
      
174
       (26 )    
*
  
Income tax benefit/(provision)
    
0
       (8 )     (61 )    
*
      
*
       (61 )    
11
      
*
  
Gain/(loss) from discontinued operations
    
0
      
13
      
113
      
*
      
*
      
113
       (15 )    
*
  
Net income
   $
2,582
     $
1,841
     $
2,672
       40 %     (3 %)   $
5,254
     $
3,415
       54 %
Preferred stock dividend requirements
   $
17
     $
-
     $
17
      
*
      
--
     $
34
     $
-
      
*
  
Earnings applicable to common shareholders
   $
2,565
     $
1,841
     $
2,655
       39 %     (3 %)   $
5,220
     $
3,415
       53 %
                                                                  
Return on average common equity
                                                                
from continuing operations
     27.5 %     23.7 %     28.8 %                     28.2 %     22.8 %        
Return on average common equity
     27.5 %     23.7 %     29.9 %                     28.7 %     22.5 %        
Pre-tax profit margin (2)
     34 %     33 %     35 %                     34 %     31 %        
Compensation and benefits as a % of net revenues
     45 %     44 %     46 %                     45 %     47 %        
                                                                 
 
(1)
Gain/(loss) from discontinued operations for the quarter ended Feb 28, 2007 reflects the operating results for Quilter Holdings Limited and the
 
gain related to the sale of this business.
(2)
Income before taxes, excluding gain/(loss) from unconsolidated investees, as a % of net revenues.
Note:
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
 
 
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