Morgan Stanley Reports
First Quarter Net Income of $905 Million;
Return on Equity of 16%


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NEW YORK, March 20, 2003 — Morgan Stanley (NYSE: MWD) today reported net income of $905 million for the quarter ended February 28, 2003 — an increase of 7 percent from the first quarter of 2002 and 24 percent from the fourth quarter of 2002. Diluted earnings per share were $0.82 — compared to $0.76 a year ago and $0.67 in the fourth quarter.

First quarter net revenues (total revenues less interest expense and the provision for loan losses) were $5.5 billion — 4 percent ahead of first quarter 2002 and 29 percent ahead of fourth quarter 2002. The annualized return on average common equity was 16 percent.

Philip J. Purcell, Chairman & CEO, and Robert G. Scott, President, said in a joint statement, "We are pleased with our performance, including our return on equity of 16 percent. This was accomplished in an exceedingly challenging environment characterized by a slumping global economy, declining consumer confidence, and a market consumed by the prospect of war in Iraq. Fixed income markets were the exception, leading to record results in our fixed income business. In addition, Discover had another strong quarter. Our focus on clients has resulted in market share gains in a number of key businesses."

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Institutional Securities posted net income of $618 million, 17 percent above last year's first quarter. The increase was driven by record revenues in the Company's fixed income business, offsetting the revenue impact of challenging market conditions on the Company's M&A advisory and equity underwriting businesses.

  • Fixed income sales and trading net revenues of nearly $1.7 billion were up 48 percent from first quarter 2002. The increase in revenues was broadly based, with strong performances throughout the Company's commodities, credit products, and interest-rate and currency groups. Higher commodities revenues were driven by higher prices and volatilities across major energy markets, while the revenue increases in credit and interest rate products reflected heavier customer volumes and a more favorable trading environment.
  • Equity sales and trading net revenues rose 5 percent from a year ago to $977 million, primarily as a result of higher market volatility partially offset by declines in customer volumes and lower commissions.
  • Advisory revenues were $166 million, down 43 percent from last year, due to declining levels of global M&A activity. Industry-wide, global completed M&A transaction volume fell 22 percent compared with first quarter 2002.1
  • Underwriting revenues of $337 million were 8 percent above last year's first quarter. A strong increase in debt underwriting revenues driven by robust levels of fixed income new issue activity was partially offset by lower equity underwriting revenues, reflecting a 60 percent industry-wide decline in equity activity.1
  • The Company ranks second in announced global M&A with a 21 percent market share; second in worldwide equity and equity related issuances with a 13 percent market share; and second in U.S. investment grade debt issuances with an 11 percent market share.2

1 Source: Thomson Financial Securities Data - for the periods: December 1, 2001 to February 28, 2002 and December 1, 2002 to February 28, 2003.
2 Source: Thomson Financial Securities Data - for the period January 1, 2003 to February 28, 2003.

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The Individual Investor Group reported a $1 million net loss compared to $7 million in net income for the first quarter of 2002, as a result of a decline in net revenues partially offset by lower non-interest expenses.

  • Net revenues decreased 12 percent from a year ago to $900 million. Retail participation in equity markets fell from last year's levels, and asset management fees declined as a result of a lower level of retail assets under management.
  • Total client assets of $499 billion were 15 percent lower than the end of last year's first quarter, reflecting in part, declines of 24 percent for the S&P 500 and 23 percent for the Nasdaq. Client assets in fee-based accounts of $106 billion fell 7 percent over the past twelve months. However, the percentage of client assets in fee-based accounts increased to 21 percent from 19 percent a year ago.
  • At quarter-end, the number of global financial advisors was 12,056 — a decrease of 490 for the quarter and 2,059 over the past year.

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Investment Management net income declined 26 percent from last year's first quarter to $106 million. Lower revenues, reflecting a decrease in average assets under management and a continued shift in asset mix away from equity products, drove the earnings decline.

  • The Company's assets under management declined $52 billion, or 12 percent, from a year ago to $400 billion, primarily as a result of a decline in market values.
  • Retail assets were $242 billion, $14 billion below the previous quarter and $38 billion below last year's first quarter. Institutional assets of $158 billion decreased $6 billion over the quarter and were $14 billion lower than a year ago.
  • Among full-service brokerage firms, the Company had the highest number of domestic funds (45) receiving one of Morningstar's two highest ratings.3 In addition, the percent of the Company's fund assets performing in the top half of the Lipper rankings over three years was 70 percent compared to 71 percent a year ago.4

3 Full service brokerage firms include: Merrill Lynch, Citigroup and Prudential. As of February 28, 2003.
4 As of February 28, 2003.

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Credit Services posted strong first quarter earnings of $182 million, 9 percent higher than the first quarter of 2002. The increase was the result of increases in merchant and cardmember fees, net interest income and other revenue — partially offset by higher non-interest expenses. Net charge-off and delinquency rates were lower than a year ago.

  • Managed credit card loans at quarter end rose 5 percent from a year ago to a record $51.8 billion. However, the interest rate spread contracted by 25 basis points over the same period, as a decline in the cost of funds was more than offset by a lower finance charge yield.
  • Merchant and cardmember fees rose 4 percent to $547 million largely as a result of higher merchant discount fees from increased transaction volume. Transaction volume rose 8 percent from a year ago to a record $26.1 billion, on increased sales and higher balance transfers.
  • The credit card net charge-off rate declined to 6.17 percent — 23 basis points below a year ago. The Company's continued focus on credit quality helped improve the contractual loss rate despite continued softness in the U.S. economy. The over-30-day delinquency rate improved 42 basis points to 6.33 percent, and the over-90-day delinquency rate improved 17 basis points to 2.95 percent from the first quarter of 2002.
  • Non-interest expenses were $608 million, up 7 percent compared to first quarter 2002 — driven by increases in marketing and advertising expenses, and higher personnel costs.

As of February 28, 2003 the Company had repurchased approximately 4 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 April 30, 2003, to common shareholders of record on April 11, 2003.

Total capital at February 28, 2003 was $72.4 billion, including $24.5 billion of common shareholders' equity and preferred securities subject to mandatory redemption. Book value per common share was $20.62, 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 26 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" in Part I, Item 1 in the Company's 2002 Annual Report on Form 10-K.

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