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SECURITIES

Securities posted net income of $539 million, 31 percent lower than last year's first quarter. The decline reflected lower net revenues across most of the Company's securities businesses. Fixed income sales and trading was an exception, with higher net revenues than last year's very strong first quarter. The effect of the overall decline in net revenues was partially offset by a 22 percent decrease in non-compensation expenses.

• In institutional sales and trading:
  • Fixed income sales and trading net revenues were $1.1 billion, a 6 percent increase from first quarter 2001. Revenues from interest rate derivatives trading increased strongly from a year ago while revenues from commodities and government debt trading were lower.
  • Equity sales and trading net revenues of $931 million were down 38 percent from a year ago, primarily due to reduced trading activity, lower levels of market volatility and a decline in primary issuance.
• In investment banking:
  • Advisory revenues were $292 million, down 35 percent from a year ago. The decline resulted primarily from the severe slowdown in global M&A activity. Industry-wide, global completed M&A transaction volume fell 72 percent in the first quarter compared to a year ago.³
  • Total underwriting revenues declined 25 percent from last year's first quarter to $383 million, due to lower debt underwriting revenues. Revenues from equity issuance were up modestly from a year ago.
• In the individual investor group:
  • Net revenues decreased 16 percent to $1.0 billion, primarily as a result of a decline in individual investor participation in equity markets from last year's first quarter levels, and a decrease in margin debit balances.
  • Total client assets of $588 billion were 8 percent lower than the end of last year's first quarter, compared to an 11 percent decline in the S&P 500 and a 20 percent decline in the NASDAQ. Client assets in fee-based accounts remained at $111 billion.
  • The number of global financial advisors stood at 14,115 at quarter-end — an increase of 425 for the quarter but a decline of 51 over the past twelve months.
• Principal investment revenues of $32 million for the first quarter compared with negative revenues of $47 million a year ago.

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INVESTMENT MANAGEMENT

Investment management net income was $142 million, 7 percent below last year's first quarter. The earnings decline resulted from a decline in average assets under management and a shift in asset mix from equity to more fixed income and money market products. A 14 percent decline in non-compensation expenses had a positive impact on net income.

• Assets under management declined $40 billion, or 8 percent, from a year ago to $452 billion, as a result of a decline in market values and net fund outflows. Retail assets were $273 billion, $7 billion lower than fourth quarter 2001 and $36 billion lower than last year's first quarter. Institutional assets of $179 billion were unchanged for the quarter and down $4 billion from a year ago.
• The Company had 57 funds rated four or five stars by Morningstar, up from 56 at the end of 2001 fiscal year-end. Among investment managers, the Company has the third highest number of domestic funds receiving one of Morningstar's two highest ratings.⁴
• The percent of the Company's fund assets performing in the top half of the Lipper rankings was 65 percent over one year, 64 percent over three years and 74 percent over five years.⁵

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CREDIT SERVICES

Credit services net income was $167 million, 18 percent ahead of first quarter 2001. The increase was driven by higher net interest and cardmember fee revenues, and lower marketing expenses. Net charge-offs, however, were higher than a year ago.

• Managed credit card loans of $49.6 billion at quarter end were relatively unchanged from a year ago. The interest rate spread widened 152 basis points over the same period, as a result of a decline in credit services' cost of funds.
• Merchant and cardmember fees rose 9 percent to $541 million, reflecting higher late fees and an increase in the merchant discount rate. Transaction volume declined 1 percent from last year's record first quarter to $24.1 billion.
• The credit card net charge-off rate increased to 6.49 percent — 170 basis points higher than a year ago. The over-90-day delinquency rate was 3.12 percent compared to 2.74 percent a year ago. The increase in the charge-off rate reflected continued weakness in the U.S. economy, the adverse impact of the seasoning of cardmember accounts and a higher number of bankruptcy filings by U.S. consumers.

As of February 28, 2002, the Company had repurchased approximately 4 million shares of its common stock since the end of fiscal 2001. The Company also announced that its Board of Directors declared a $0.23 quarterly dividend per common share. The dividend is payable on April 26, 2002 to common shareholders of record on April 5, 2002.

Total capital at February 28, 2002 was $61.0 billion, including $22.1 billion of common shareholders' equity and preferred securities issued by subsidiaries. Book value per common share was $18.97, based on 1.1 billion shares outstanding.

Morgan Stanley is a global financial services firm and a market leader in securities, investment management and credit services. With more than 700 offices in 28 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.

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