Morgan Stanley Reports Second
Quarter Net Income of $599 Million;
Return on Equity of 10.6%;
Including a Pre-tax Aircraft
Impairment Charge of $287 Million

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INTRODUCTION

NEW YORK, June 18, 2003 — Morgan Stanley (NYSE: MWD) today reported net income of $599 million for the quarter ended May 31, 2003, including a pre-tax asset impairment charge of $287 million related to the Company's aircraft financing business. Diluted earnings per share were $0.55 and the annualized return on average common equity was 10.6 percent. The aircraft impairment charge reduced net income by $172 million, diluted earnings per share by $0.16 and the annualized return on average common equity by 3.1 percentage points.

Net revenues (total revenues less interest expense and the provision for loan losses) of $5.0 billion were 2 percent higher than last year's second quarter and 8 percent below this year's first quarter.

Philip J. Purcell, Chairman & CEO, and Robert G. Scott, President, said in a joint statement, "While there have been some encouraging signs recently, the business environment has continued to be very difficult. Nonetheless, we performed well with our fixed income business making a major contribution to our earnings. We believe our expense initiatives and market share in major business segments position us well to capitalize on future upswings in business activity."

Year-to-date net income was $1,504 million, diluted earnings per share were $1.37 and the annualized return on average common equity was 13.4 percent. The aircraft impairment charge reduced year-to-date net income by $172 million, diluted earnings per share by $0.16 and the annualized return on average common equity by 1.5 percentage points. Net revenues (total revenues less interest expense and the provision for loan losses) of $10.5 billion were 3 percent higher than a year ago.

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INSTITUTIONAL SECURITIES

Institutional Securities net income declined 33 percent to $298 million, reflecting the $287 million pretax ($172 million after tax) aircraft impairment charge. Net revenues increased 11 percent driven by strong revenues in the Company's fixed income business — which achieved its second best quarter ever. Challenging market conditions continued to negatively impact M&A advisory and equity revenues.

  • Fixed income sales and trading net revenues increased 48 percent from second quarter 2002 to $1.3 billion. The increase resulted from strong performances across the Company's credit products, interest-rate and currency products, and commodities groups. The revenue increases in credit and interest rate products reflected tighter spreads, strong investor demand and an improved trading environment. Higher commodities revenues were driven by higher volatilities, largely in oil markets.
  • Equity sales and trading net revenues declined 9 percent from a year ago to $865 million, primarily due to lower revenues from the Company's global cash business.
  • Advisory revenues were $141 million, down 44 percent from last year due to declining levels of global M&A activity. Industry-wide, global completed M&A transaction volume fell 18 percent compared with second quarter 2002.1
  • Underwriting revenues of $322 million were 5 percent below last year's second quarter, despite a 41 percent industry-wide decline in overall equity underwriting activity and a 78 percent decline in IPOs. Fixed income activity was essentially unchanged from a year ago. An improved market share in equity and a stable market share in fixed income contributed to these results.2
  • For the calendar year-to-date, the Company ranked third in completed global M&A with a 20 percent market share; sixth in announced global M&A with a 13 percent market share; second in worldwide equity and equity related issuances with a 13 percent market share; and fourth in U.S. investment grade debt issuances with an 11 percent market share.3
1, 2 Source: Thomson Financial Securities Data - for the periods: March 1, 2002 to May 31, 2002 and March 1, 2003 to May 31, 2003.
3 Source: Thomson Financial Securities Data - for the period January 1, 2003 to May 31, 2003.

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INDIVIDUAL INVESTOR GROUP

The Individual Investor Group reported a $2 million net loss compared to $12 million in net income for second quarter 2002.

  • Net revenues decreased 11 percent from a year ago to $924 million. Retail participation in equity markets was below last year's levels, and asset management fees declined primarily as a result of lower assets under management.
  • Non-interest expenses of $916 million were 10 percent below last year.
  • Total client assets of $532 billion were 7 percent lower than the end of last year's second quarter, reflecting, in part, a 10 percent decline for the S&P 500. Client assets in fee-based accounts fell 3 percent to $113 billion over the past twelve months. However, the percentage of client assets in fee-based accounts increased to 21 percent from 20 percent a year ago.
  • At quarter-end, the number of global financial advisors was 11,644 — a decrease of 412 for the quarter and 2,063 over the past year.

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INVESTMENT MANAGEMENT

Investment Management net income declined 23 percent from last year's second quarter to $109 million. Lower revenues, reflecting a decrease in average assets under management and a shift in asset mix away from equity products, drove the earnings decline. An 8 percent decline in non-interest expenses partially offset the lower revenues.

  • The Company's assets under management were $421 billion, up $17 billion over the first quarter of this year but $30 billion below the second quarter of last year. The increase during the quarter was due to market appreciation, while the decline from last year reflected market depreciation and negative net customer flows.
  • Retail assets of $259 billion were $13 billion higher than the end of the first quarter but $17 billion lower than a year ago. Institutional assets were $162 billion, an increase of $4 billion for the quarter but $13 billion below last year.
  • Among full-service brokerage firms, the Company had the highest number of domestic funds (47) receiving one of Morningstar's two highest ratings.4 In addition, the percent of the Company's fund assets performing in the top half of the Lipper rankings over three years was 69 percent compared to 71 percent a year ago.5
4 Full service brokerage firms include: Merrill Lynch, Citigroup and Prudential. As of April 30, 2003.
5 As of April 30, 2003.

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CREDIT SERVICES

Credit Services quarterly net income of $194 million was slightly below the second quarter of 2002. On a managed basis, increases in the provision for loan losses and non-interest expenses were offset by higher net interest income and merchant and cardmember fees.

  • Managed credit card loans at quarter end rose 3 percent from a year ago to $50.9 billion. The interest rate spread widened 6 basis points over the same period, as a decline in the cost of funds more than offset a lower finance charge yield.
  • Merchant and cardmember fees rose 2 percent to $524 million as a result of higher merchant discount fees from increased transaction volume. Transaction volume also rose 2 percent from a year ago to $24.0 billion, primarily as a result of increased sales.
  • The credit card net charge-off rate increased to 6.50 percent — 15 basis points above a year ago. The over-30-day delinquency rate increased 58 basis points to 6.21 percent, and the over-90-day delinquency rate increased 36 basis points to 3.01 percent from the second quarter of 2002. Persistent weakness in the economy, reflected in high levels of unemployment and bankruptcy filings, has driven losses and delinquencies higher.
  • Non-interest expenses of $576 million were up 2 percent compared to second quarter 2002 driven by higher marketing and advertising expenses.

As of May 31, 2003, the Company had repurchased approximately 9 million shares of its common stock since the end of fiscal 2002. The Company also announced that its Board of Directors declared a $0.23 quarterly dividend per common share. The dividend is payable on July 31, 2003, to common shareholders of record on July 11, 2003.

Total capital at May 31, 2003 was $78.7 billion, including $25.3 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $20.83, 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 600 offices in 27 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.

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DISCLAIMER
This release may contain forward-looking statements. These statements reflect management's beliefs and expectations, and 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" in Part I, Item 1 in the Company's 2002 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 2003.

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