3 The Company maintains various deferred compensation plans for the benefit of certain employees. Beginning in the quarter ended February 28, 2007, increases or decreases in assets or earnings associated with such plans are reflected in net revenues, and increases or decreases in liabilities associated with such plans are reflected in compensation expense. Previously, the increases or decreases in assets and liabilities associated with these plans were both recorded in net revenues. Prior period activity has been reclassified to conform to the current presentation.
For the first two months of calendar 2007, the Company ranked second in global completed M&A with a 34 percent market share, sixth in global announced M&A with a 26 percent market share, fifth in global IPOs with a 7 percent market share, eighth in global equity and equity-related issuances with a 6 percent market share and sixth in global debt issuance with a 6 percent market share.4
GLOBAL WEALTH MANAGEMENT GROUP
Global Wealth Management Group’s pre-tax income for the first quarter was $220 million, compared with $15 million in the first quarter of last year. The quarter's pre-tax margin was 15 percent compared with 1 percent in last year’s first quarter. The quarter’s return on average common equity was 32 percent compared with 1 percent a year ago, reflecting the increase in net income and lower capital allocated to the business.
| · | Net revenues of $1.5 billion were up 18 percent from a year ago reflecting stronger transactional revenues due to increased underwriting activity, higher asset management revenues reflecting growth in fee-based products and higher net interest revenue from the bank deposit sweep program. |
| · | Non-interest expenses were $1.3 billion, up 2 percent from a year ago. Compensation costs increased from a year ago, due to higher revenues and investment in the business. This increase was partly offset by the incremental compensation charges recorded in the first quarter of 2006.1 Non-compensation expenses declined reflecting lower charges for legal and regulatory matters. |
| · | Total client assets were $690 billion, an 11 percent increase from last year’s first quarter. Client assets in fee-based accounts rose 17 percent to $202 billion over the last 12 months and represent 29 percent of total client assets. |
| · | The 7,993 global representatives at quarter-end achieved record average annualized revenue and total client assets per global representative of $748,000 and $86 million, respectively. |
In addition, included in the Company’s discontinued operations is a $168 million pre-tax gain on the sale of Quilter Holdings Ltd.
4 Source: Thomson Financial - for the period January 1, 2007 to February 28, 2007.
ASSET MANAGEMENT
Asset Management reported pre-tax income of $236 million, 37 percent higher than last year's $172 million. The quarter’s pre-tax margin was 26 percent compared with 24 percent a year ago and the return on average common equity was 20 percent compared with 21 percent in last year’s first quarter.
| · | Net revenues increased 28 percent to $905 million primarily reflecting higher management and administration fees due to an increase in assets under management and higher performance fees from the alternatives business, including FrontPoint Partners. Higher investment revenues were driven by gains in private equity and alternative investments. |
| · | Non-interest expenses increased 26 percent to $669 million driven by higher compensation costs resulting from increased revenues and business investment, particularly in the alternatives business, including operating expenses associated with FrontPoint Partners. |
| · | Assets under management or supervision at February 28, 2007 were $500 billion, up $58 billion, or 13 percent, from a year ago. The increase resulted from market appreciation, acquisitions and minority interest investments, as inflows from the Americas Intermediary, Non-U.S. and Institutional Liquidity products were offset by Morgan Stanley Brand, U.S. Institutional, and Retail Money Market outflows. |
| · | Asset Management recorded net customer inflows of $4.3 billion for the quarter compared with $6.9 billion of outflows a year ago. |
| · | The percent of the Company’s long-term fund assets performing in the top half of the Lipper rankings was 48 percent over one year, 63 percent over three years, 73 percent over five years and 82 percent over 10 years. |
DISCOVER
Discover’s first quarter pre-tax income was $372 million on a managed basis, a 22 percent decline compared with $479 million in last year’s first quarter. Net revenues of $1,025 million were 6 percent lower than a year ago, which included an increase in the valuation of the Company's residual interests in securitized receivables following changes in federal bankruptcy legislation in 2005. The quarter’s pre-tax margin was 36 percent compared with 44 percent a year ago. The quarter’s return on average common equity was 17 percent compared with 26 percent a year ago.
| · | Transaction volume increased 13 percent from a year ago to a record $30.3 billion, primarily driven by higher sales volume resulting from increased cardmember usage and the acquisition of the Goldfish credit card business. |
| · | Managed credit card loans of $50.7 billion were up 6 percent from a year ago and up 1 percent from the end of last year. |
| · | Managed merchant, cardmember and other fees were $552 million, up 6 percent from a year ago. The increase was primarily due to higher merchant discount revenues driven by higher sales activity and higher cardmember related fee revenue, partly offset by higher cardmember rewards. |
| · | Other non-interest revenue was $5 million compared with $143 million in last year’s first quarter, which benefited from the increase in the valuation of the Company's residual interests in securitized receivables discussed above. |
| · | The provision for consumer loan losses on a managed basis was $482 million, down 5 percent from last year, reflecting continued strong credit quality in the domestic portfolio, partially offset by increased credit losses in the U.K. |
| · | Managed net interest income of $950 million increased $16 million, or 2 percent, reflecting an 8 percent increase in average credit card loans, partially offset by a narrowing of the interest rate spread as a higher yield was more than offset by a higher cost of funds. |
| · | Non-interest expenses increased 7 percent to $653 million, primarily due to higher marketing and professional services and the inclusion of operating expenses associated with the Goldfish credit card business. |
| · | The managed credit card net charge-off rate was 4.05 percent, 101 basis points lower than last year's first quarter. The managed credit card over-30-day delinquency rate was 3.45 percent, unchanged from the first quarter of 2006, and the over-90-day delinquency rate increased 8 basis points over the same period to 1.69 percent. |
OTHER MATTERS
Effective December 1, 2006, the Company elected early adoption of SFAS No. 157, "Fair Value Measurements," and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115." As a result of the adoption of SFAS No. 157 and SFAS No. 159, the Company recorded an after-tax cumulative effect adjustment of $186 million as an increase to the opening balance of retained earnings as of December 1, 2006. The adoption of these two standards had an immaterial impact in the first quarter.
As of February 28, 2007, the Company repurchased approximately 15 million shares of its common stock since the end of fiscal 2006.
The Company announced that its Board of Directors declared a $0.27 quarterly dividend per common share. The dividend is payable on April 30, 2007, to common shareholders of record on April 13, 2007. The Company also announced that its Board of Directors declared a quarterly dividend of $378.75 per share of Series A Floating Rate Non-Cumulative Preferred Stock (represented by depositary shares, each representing 1/1,000th interest in a share of preferred stock and each having a dividend of $0.37875) to be paid on April 16, 2007 to preferred shareholders of record on April 1, 2007.
Total capital as of February 28, 2007 was $177.3 billion, including $42.8 billion of common shareholders' equity, preferred equity and junior subordinated debt issued to capital trusts. Book value per common share was $34.71, based on 1.1 billion shares outstanding.
Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management, wealth management and credit services. The Company’s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 600 offices in 31 countries. For further information about Morgan Stanley, please visit www.morganstanley.com.
A financial summary follows. Financial, statistical and business-related information, as well as information regarding business and segment trends, is included in the Financial Supplement. Both the earnings release and the Financial Supplement are available online in the Investor Relations section at www.morganstanley.com.
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(See Attached Schedules)
The information above contains forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and which reflect management’s current estimates, projections, expectations or beliefs and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see “Forward-Looking Statements” immediately preceding Part I, Item 1, “Competition” and “Regulation” in Part I, Item 1, “Risk Factors” in Part I, Item 1A and “Certain Factors Affecting Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended November 30, 2006.
