Morgan Stanley Earns $930 Million In Second Quarter
Despite A Difficult Market Environment;
Return On Equity Is 19%

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INTRODUCTION

NEW YORK, June 21, 2001 — Morgan Stanley (NYSE: MWD) today reported net income of $930 million for the quarter ended May 31, 2001 — a 36 percent decline from $1,458 million in last year's second quarter. Diluted earnings per share were $0.82 — down 35 percent from $1.26 a year ago.

Second quarter net revenues (total revenues less interest expense and the provision for loan losses) were $6.0 billion — 15 percent below a year ago. The annualized return on average common equity for the quarter was 19 percent.

Philip J. Purcell, Chairman, and Robert G. Scott, President, said in a joint statement, "During the second quarter, we continued to operate in a difficult environment, especially in the securities segment, where depressed levels of activity in equity underwriting and global M&A adversely affected results. Even so, our firm earned $930 million for the quarter and achieved a 19 percent return on shareholders' equity. We continue to focus on the needs of our clients, gaining efficiencies and building market share in this challenging time. We remain confident that the long-term trends are very positive for global financial services."

In the first six months of fiscal 2001, net income was $2,005 million, 33 percent lower than $3,002 million a year ago.1 Six-month diluted earnings per share were $1.76, down 32 percent from last year's $2.60. Net revenues declined 14 percent to $12.4 billion. The annualized return on average common equity was 21 percent for the first six months of the year.

1 All amounts for the six months ended May 31, 2001 exclude a net after-tax charge of $59 million, or $.05 per share, resulting from the adoption of SFAS 133 on December 1, 2000. See Page F-1 of Financial Summary, Note 1.

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SECURITIES

The Company's securities business posted net income of $635 million, a 42 percent decrease from last year's exceptionally strong second quarter. The decline reflected a much lower level of activity in both the institutional and individual investor businesses. Fixed income was the exception, achieving a record quarter.

  • Institutional sales and trading net revenues of $2.5 billion were 9 percent below a year ago.
    • The outstanding quarter in fixed income was largely due to continued strength in government debt, investment grade debt and commodities trading. Favorable debt market conditions, including the recent round of interest rate cuts in the U.S., and high levels of volatility in energy markets, contributed to the division's strong results.
    • Equity revenues declined from the record levels achieved a year ago, primarily as a result of lower volatility, a decline in primary issuance and increased margin pressure.
  • In investment banking:
    • Advisory revenues were $291 million, down 55 percent from last year's second quarter. The decline resulted primarily from the sharp decrease in global M&A activity that began late last year. Industry-wide, global completed M&A transaction volume fell 58 percent during the second quarter compared to a year ago.
    • Underwriting revenues declined 29 percent from last year's second quarter to $495 million, primarily reflecting a 37 percent decrease in industry-wide global equity new issue volume.
    • Currently, the Company ranks second in announced global M&A transactions with a 24 percent market share, has maintained its leadership position in worldwide equity and equity related issues with a market share of 12 percent, and ranks first in Worldwide and U.S. IPOs.2
  • In the individual investor group:
    • Net revenues declined 24 percent to $1.1 billion as retail participation in equity markets fell sharply from last year's levels. Net interest income also declined sharply as a result of lower margin debit balances. Revenues from asset management products and fee-based assets were slightly lower than a year ago.
    • Total client assets of $634 billion were 5 percent lower than a year ago. Client assets in fee-based accounts increased 4 percent from last year's second quarter to $117 billion — largely due to the acquisition of Quilter Holdings, a UK-based investment management business.
    • The number of global financial advisors rose to 14,256 — an increase of 148 for the quarter and 743 over the past twelve months.
  • Securities' principal investment activities had negative revenues of $107 million for the second quarter compared with negative revenues of $242 million a year ago.
2 Source: Thomson Financial Securities Data — January 1 to June 18, 2001.

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ASSET MANAGEMENT

Asset management net income was $124 million, 21 percent below last year's second quarter. The decline in earnings resulted from a modest decline in the Company's average assets under management and a continued shift to a lower percentage of equity products in the asset mix.

  • Assets under management declined $21 billion, or 4 percent, from a year ago to $487 billion, entirely due to lower market values.
  • Retail assets of $303 billion were $6 billion lower than the first quarter and $11 billion lower than a year ago. Institutional assets increased $1 billion for the quarter but were $10 billion lower than a year ago — to stand at $184 billion.
  • The Company had 65 funds rated four or five stars by Morningstar, up from 46 a year ago. Among investment managers, the Company has the second highest number of domestic funds receiving one of Morningstar's two highest ratings.3
3 As of April 2001.

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CREDIT SERVICES

Credit services net income was $171 million, 19 percent lower than the second quarter of 2000 — reflecting higher net charge-offs and non-interest expenses partially offset by an increase in net interest income.

  • Managed credit card loans rose to a record $50.2 billion at quarter end, an increase of $6.5 billion, or 15 percent, from a year ago. The interest rate spread widened 19 basis points over the same period, largely due to the decline in interest rates that began in the first quarter of the year.
  • Merchant and cardmember fees rose 6 percent to $635 million. Transaction volume increased 7 percent from the second quarter of 2000 to $23.5 billion, driven primarily by higher quarterly sales volume.
  • The credit card net charge-off rate increased to 4.98 percent — 77 basis points higher than a year ago. The over-30-day delinquency rate was 5.84 percent compared to 5.11 percent a year ago. The increase in both the charge-off and delinquency rates reflected both the continued weakness in the U.S. economy and the aging of cardmember accounts opened after 1998. In addition, accounts with bankruptcy notifications, which are written off 60 days after receipt, trended significantly higher during the quarter.
  • Total non-interest expenses rose 14 percent over a year ago, reflecting increased investments in customer service and collection activities. The ratio of non-interest expenses to average consumer loans, however, was unchanged from a year ago.
  • Discover opened 1.4 million new cardmember accounts during the quarter, and enrolled 204,000 new merchant locations — a 17 percent increase from the second quarter enrollment a year ago.

The Company has repurchased approximately 14 million shares of its common stock since the end of fiscal 2000. The Company also announced that its Board of Directors declared a $0.23 quarterly dividend per common share. The dividend is payable on July 27, 2001 to common shareholders of record on July 6, 2001.

Total capital at May 31, 2001 was $61.3 billion, including $20.4 billion of common and preferred stockholders' equity and preferred securities issued by subsidiaries. Book value per common share was $17.54, based on shares outstanding of 1.1 billion.

Morgan Stanley is a global financial services firm and a market leader in securities, asset 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.

Access this press release online at morganstanley.com

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This release may contain forward-looking statements. These statements, which reflect management's beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company's future results, please see "Certain Factors Affecting Results of Operations" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Competition and Regulation" under each of "Securities," "Asset Management" and "Credit Services" in Part I, Item 1 in the Company's 2000 Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Conditions and Results of Operations" in the Company's Quarterly Reports on Form 10-Q for fiscal 2001.

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