Morgan Stanley Reports
Third Quarter Net Income of $611 Million;
Return on Equity of 11.4%

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INTRODUCTION

NEW YORK, September 19, 2002 — Morgan Stanley (NYSE: MWD) today reported net income of $611 million for the quarter ended August 31, 2002 — a 17 percent decline from the third quarter of 2001 and 23 percent lower than the second quarter of 2002. Diluted earnings per share were $0.55 — compared to $0.65 a year ago and $0.72 in the second quarter.1

Third quarter net revenues (total revenues less interest expense and the provision for loan losses) were $4.6 billion — 11 percent below third quarter 2001 and 7 percent below second quarter 2002. The annualized return on average common equity for the current quarter was 11.4 percent.

Philip J. Purcell, Chairman & CEO, and Robert G. Scott, President, said in a joint statement, "We've done a good job in balancing profitability and risk in a tough environment. We have continued to face a severe cyclical downturn, yet we've had to make sure we don't weaken our franchise and our capacity for future growth. In this difficult time, we are proud of how our people have served the best interests of our clients."

In the first nine months of fiscal 2002, net income was $2,256 million, 18 percent lower than $2,740 million a year ago. Nine-month diluted earnings per share were $2.03, down 16 percent from last year's $2.41.2 Net revenues declined 15 percent and non-compensation expenses declined 13 percent from a year ago. The annualized return on average common equity for the nine-month period was 14.3 percent.

1 Amounts for the three months ended August 31, 2001 exclude an extraordinary loss of $30 million, or $.03 per share, related to the early extinguishment of debt. See page F-1 of Financial Summary, Note 1.
2 Amounts for the nine months ended August 31, 2001, exclude an after-tax charge of $59 million, or $.05 per share, resulting from the adoption of SFAS 133 on December 1, 2000, and an extraordinary loss of $30 million, or $.03, related to the early extinguishment of debt. See page F-1 of Financial Summary, Note 1.

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SECURITIES

Securities posted net income of $265 million, 36 percent lower than last year's third quarter. The decline in earnings reflected the impact of difficult markets on virtually all of the Company's securities businesses.

  • In the institutional business:
    • Advisory revenues were $149 million, down 59 percent from a year ago. The decline resulted primarily from depressed levels of global M&A activity. Industry-wide, global completed M&A transaction volume was 51 percent lower in the third quarter compared to a year ago.3
    • Underwriting revenues of $325 million were 25 percent lower than last year's third quarter, reflecting declines in industry-wide global equity and debt underwriting issuances.
    • Fixed income sales and trading net revenues were $548 million, a 33 percent decrease from third quarter 2001. Weakness in most product areas was partially offset by strength in interest rate derivatives and foreign exchange trading.
    • Equity sales and trading net revenues of $1,066 million were up 7 percent from a year ago, primarily due to higher levels of market volatility and volumes.
  • In the individual investor group:
    • Net revenues decreased 5 percent to $1.0 billion, as retail participation in equity markets fell from last year's levels. The quarter's revenues also included $95 million associated with the sale of the Company's MS Online brokerage accounts, and a $45 million writedown of an equity investment related to the Company's European retail securities activities.
    • Total client assets of $520 billion were 13 percent lower than the end of last year's third quarter, compared to declines of 19 percent for the S&P 500 and 27 percent for the Nasdaq. Client assets in fee-based accounts of $103 billion declined 6 percent over the past twelve months. However, the percentage of client assets in fee-based accounts increased to 20 percent from 18 percent a year ago.
    • At quarter-end, the number of global financial advisors stood at 13,590 — a decrease of 117 for the quarter and 752 over the past year.
  • Total securities non-compensation expenses were unchanged from the third quarter of 2001. However, these expenses declined 6 percent, excluding asset impairment charges of $74 million associated with the Company's aircraft leasing business, costs of $47 million related to the sale of the MS Online accounts, and a credit of $59 million related to the resolution of certain legal matters.
3 Source: Thomson Financial Securities Data — June 1 to August 31, 2002.

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INVESTMENT MANAGEMENT

Investment Management net income rose 6 percent from last year's third quarter to $136 million as a result of a continued reduction of operating expenses. Net revenues were 13 percent lower than a year ago, primarily due to a decline in average assets under management and a shift in asset mix to a lower level of equity products.

  • The Company's assets under management declined $47 billion, or 10 percent, from a year ago to $424 billion, primarily as a result of a decline in market values.
  • Retail assets were $252 billion, $17 billion below this year's second quarter and $40 billion below last year's third quarter. Institutional assets of $172 billion decreased $10 billion over the quarter and were $7 billion lower than a year ago. Net flows (excluding money markets) were essentially flat during the quarter and modestly positive year-to-date.
  • Among investment managers, the Company had the fourth highest number of domestic funds (50) receiving one of Morningstar's two highest ratings.4
  • Total non-compensation expenses declined 23 percent from the third quarter of 2001. Excluding a net credit of $27 million related to the resolution of certain legal matters, expenses declined 11 percent.
4 As of July 31, 2002.

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CREDIT SERVICES

Credit Services posted strong third quarter earnings of $210 million, 7 percent ahead of the third quarter of 2001.

  • Managed credit card loans at quarter end of $49.7 billion were flat to a year ago. The interest rate spread widened 80 basis points over the same period, driven by a decline in cost of funds.
  • Merchant and cardmember fees rose 1 percent to $547 million primarily as a result of higher merchant discount from increased transaction volume. Transaction volume rose 4 percent from a year ago to $24.3 billion.
  • The credit card net charge-off rate rose to 6.02 percent — 23 basis points higher than a year ago — largely due to the continued softness in the U.S. economy. The over-30-day delinquency rate, however, improved 59 basis points to 5.72 percent, and the over-90-day delinquency rate was 2.49 percent — the lowest level in the last seven quarters.
  • Non-interest expenses were $614 million, up 7 percent compared to third quarter 2001 — driven by increased marketing and advertising expenses and higher personnel costs.

As of August 31, the Company had repurchased approximately 14 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 October 25, 2002, to common shareholders of record on October 4, 2002.

Total capital at August 31, 2002 was $66.6 billion, including $22.6 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $19.59, 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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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" under each of "Securities," "Investment Management" and "Credit Services" in Part I, Item 1 in the Company's 2001 Annual Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Quarterly Reports on Form 10-Q for fiscal 2002.

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