Morgan Stanley Reports Third Quarter Net Income Of $735 Million
In Difficult Operating Environment;
ROE Is 15% For The Quarter

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INTRODUCTION

NEW YORK, September 21, 2001 — In announcing results for its fiscal third quarter today, Morgan Stanley (NYSE: MWD) Chairman and CEO Philip J. Purcell and President Robert G. Scott said in a joint statement,

"It is obviously difficult to focus on financial results in the aftermath of last week's tragic events. However, we want investors to know that Morgan Stanley remains strong — not just financially, but also in terms of the will of our people, who have again proven their resilience. We are grateful for the help and support we have received from hundreds of individuals and businesses. We are doing everything we can to help all the victims, including firefighters, police and rescue workers who put themselves in harm's way for us.

While concern has increased regarding the outlook for the global economy, we continue to believe in the long-term growth opportunities for the Firm. Consistent with this belief, we announced earlier this week that the Firm would be stepping up its share repurchase activities."

Morgan Stanley reported net income of $735 million for the quarter ended August 31, 2001 — a 41 percent decline from $1,246 million in last year's third quarter. Diluted earnings per share were $0.65 — down 40 percent from $1.09 a year ago.1

Third quarter net revenues (total revenues less interest expense and the provision for loan losses) were $5.3 billion — 16 percent below a year ago. The annualized return on average common equity for the quarter was 15 percent.

In the first nine months of fiscal 2001, net income was $2,740 million, 35 percent lower than $4,248 million a year ago. Nine-month diluted earnings per share were $2.41, down 35 percent from last year's $3.70. Net revenues declined 15 percent to $17.7 billion. The annualized return on average common equity was 19 percent for the first nine months of the year.

1 All amounts for the quarter and nine-months ended August 31, 2001 exclude an extraordinary loss, net of taxes, of $30 million, or $0.03 per share, resulting from the early extinguishment of debt. In addition, all amounts for the nine months ended August 31, 2001 exclude a net after-tax charge of $59 million, or $0.05 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

Securities posted net income of $414 million, a 50 percent decline from last year's strong third quarter. The decline reflected substantially lower levels of activity year-over-year in almost all the institutional and individual investor businesses. Fixed income continued to be the exception, although results were down from the record second quarter.

  • Institutional sales and trading net revenues of $1.8 billion were 8 percent below a year ago.
    • Higher fixed income revenues were driven by strength in government debt, investment grade debt and commodities trading. Interest rate cuts in the U.S. and Europe contributed positively to the results. The business also benefited from continued demand for investment grade issues and volatility in energy markets, although both were substantially lower than the second quarter.
    • Equity revenues declined from the strong levels achieved a year ago, primarily as a result of lower volatility, a decline in primary issuance and increased margin pressures — particularly in U.S. and European cash businesses.
  • In investment banking:
    • Advisory revenues were $360 million, down 30 percent from last year's third 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 56 percent in the third quarter compared to a year ago.2
    • Underwriting revenues declined 34 percent from last year's third quarter to $417 million, primarily reflecting a 36 percent decrease in industry-wide global equity new issue volume.3
    • The Company's market share positions are: 25 percent in announced global M&A transactions; 11 percent in worldwide equity and equity related issues; and 20 percent in worldwide IPOs.4
  • In the individual investor group:
    • Net revenues declined 20 percent to $1.1 billion as retail participation in equity markets remained sharply below last year's levels. Net interest income was also lower as a result of a decline in margin debit balances. Revenues from asset management products and fee-based assets were modestly below year ago levels.
    • Total client assets of $597 billion were 23 percent lower than last year's third quarter compared to 25 percent and 57 percent declines for the S&P 500 and NASDAQ, respectively. Client assets in fee-based accounts declined 14 percent to $109 billion. However, the percentage of client assets in fee-based accounts increased to 18 percent versus 16 percent a year ago.
    • The number of global financial advisors rose to 14,342 at quarter end.
  • Principal investment activities had negative revenues of $58 million for the third quarter compared with revenues of $55 million a year ago.
2 Source: Thomson Financial Securities Data.
3 Source: Thomson Financial Securities Data.
4 Source: Thomson Financial Securities Data — January 1 to August 31, 2001.

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INVESTMENT MANAGEMENT

Investment management net income was $125 million, 36 percent below last year's third quarter. The decline in earnings resulted from a decline in the Company's average assets under management and a shift from equity to fixed income and money market products.

  • Assets under management declined $73 billion, or 13 percent, from a year ago to $471 billion, primarily as a result of lower market values. Retail assets of $292 billion were $11 billion lower than the second quarter and $53 billion lower than a year ago. Institutional assets decreased $5 billion for the quarter and $20 billion from a year ago — to stand at $179 billion.
  • The Company had 60 funds rated four or five stars by Morningstar, up from 52 a year ago. Among investment managers, the Company has the third highest number of domestic funds receiving one of Morningstar's two highest ratings.5
  • Investment management has now had five consecutive years of net positive retail customer inflows.
5 As of July 31, 2001.

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CREDIT SERVICES

Credit services net income was $196 million, 14 percent below third quarter 2000 — primarily due to higher net charge-offs partially offset by increases in net interest income, and merchant and cardmember fees.

  • Managed credit card loans rose to $49.7 billion at quarter end, an increase of $4.9 billion, or 11 percent, from a year ago. The interest rate spread widened 79 basis points over the same period, as a result of the decline in interest rates that began in the first quarter.
  • Merchant and cardmember fees rose 3 percent to $674 million. Transaction volume increased 6 percent from the third quarter of 2000 to $23.3 billion, driven primarily by record quarterly sales volume.
  • The credit card net charge-off rate increased to 5.79 percent — 161 basis points higher than a year ago. The over-90-day delinquency rate was 2.61 percent compared to 2.21 percent a year ago. The increase in the charge-off rate reflected continued weakness in the U.S. economy and the adverse impact of the seasoning of cardmember accounts and a high level of national bankruptcy filings.
  • Discover opened over 1 million new cardmember accounts during the quarter.

As of August 31, the Company had repurchased approximately 18 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 October 26, 2001 to common shareholders of record on October 5, 2001.

Total capital at August 31, 2001 was $60.7 billion, including $21.2 billion of common and preferred stockholders' equity and preferred securities issued by subsidiaries. Book value per common share was $17.76, based on shares outstanding of 1.1 billion.

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.

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. In addition, the tragic events of September 11, 2001 caused temporary securities market and other business disruptions and will likely have an adverse impact on the global economy.

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