Morgan Stanley 1st Quarter Earnings Increase 20% to $1.5 Billion; Net

Morgan Stanley 1st Quarter Earnings Increase 20% to $1.5 Billion; Net Revenues Up 10%, with Increases in All Businesses; Return on Equity at 21%

    Business Editors

    NEW YORK--(BUSINESS WIRE)--March 17, 2005--Morgan Stanley (NYSE: MWD) today reported net income of $1,468 million for the quarter ended February 28, 2005 -- up 20 percent from the first quarter of 2004 and 22 percent from the fourth quarter of 2004. Diluted earnings per share were $1.35 compared with $1.11 a year ago and $1.09 in the fourth quarter. The annualized return on average common equity was 20.7 percent in the current quarter, compared with 19.2 percent in the first quarter of 2004 and 17.4 percent last quarter. The quarter's results included a $49 million (after-tax) benefit from the cumulative effect of an accounting change for equity-based compensation resulting from the Company's adoption of SFAS No. 123(R).
    Net revenues (total revenues less interest expense and the provision for loan losses) of $6.8 billion were 10 percent higher than last year's first quarter and 26 percent ahead of last year's fourth quarter. Non-interest expenses of $4.7 billion were 8 percent higher than a year ago and 24 percent above last quarter. The quarter included a $260 million charge related to the Sunbeam/Coleman litigation, as well as a cumulative $109 million expense as a result of a correction in the method of accounting for rent escalation clauses and rent-free periods included in certain real estate leases (lease adjustment). Expenses in the quarter were reduced by $251 million as a result of the settlement of the Company's insurance claims related to the events of September 11, 2001 (insurance settlement).

    BUSINESS HIGHLIGHTS

--	In Institutional Securities, fixed income achieved record quarterly sales and trading revenues of $2 billion, up 21 percent from a strong first quarter of 2004 and 124 percent from the fourth quarter of 2004. Equity sales and trading revenues were the highest in nearly four years, and included record results in Prime Brokerage.
--	For the first two months of calendar 2005, the Company ranked first in global IPOs, second in global equity and equity-linked issuances and third in both global debt issuances and global announced M&A.
--	The Individual Investor Group had its highest revenues since the second quarter of 2001 and achieved a significant improvement in its pre-tax profit margin from the fourth quarter of last year.
--	Firmwide assets under management reached $576 billion at quarter end, a 14 percent increase from a year ago.(1)
--	Discover Card's pre-tax earnings of $380 million were a quarterly record, driven by continued improvement in credit quality.

    Philip J. Purcell, Chairman and CEO, said, "Profits were excellent, led by a record quarter in fixed income and Discover. We continue to see growth opportunities across our businesses."

    INSTITUTIONAL SECURITIES

    Institutional Securities posted pre-tax income(2) of $1,145 million, down 3 percent from $1,183 million in the first quarter of 2004. A 14 percent increase in net revenues to $4.0 billion was driven by record sales and trading revenues in the Company's fixed income business and improved results in equity sales and trading. Expenses included a $260 million charge related to the Sunbeam/Coleman litigation and $71 million for the lease adjustment. The quarter's pre-tax margin was 29 percent compared with 33 percent a year ago. Excluding the legal charge and lease adjustment, the pre-tax margin was 37 percent.

    -- Fixed income sales and trading net revenues were a record $2.0
    billion, a 21 percent increase over a strong first quarter of
    2004. The increase was broad-based, with strong performances
    across the interest rate & currency products, credit products
    and commodities groups. Interest rate & currency products
    benefited from strong new deal activity with clients and
    successful interest rate, foreign exchange and volatility
    positioning. This particularly benefited the emerging markets
    and interest rate cash and derivatives businesses. Credit
    products benefited from the continued tightening in global
    credit spreads, successful distressed credit trading and
    strong securitized products performance. The higher revenues
    in commodities were attributable to North America electricity
    and natural gas activities. Although down from a strong prior
    year, oil liquids continued to be a significant contributor.

    -- Equity sales and trading net revenues were $1.2 billion, a 10
    percent increase from a year ago and the highest since the
    second quarter of 2001. Record revenues in the Company's Prime
    Brokerage business were a substantial contributor to the
    increase. Higher revenues were also achieved in the
    derivatives business, despite lower volatilities, largely due
    to strong customer flows.

    -- The Company's aggregate average trading VaR was $96 million in
    the current quarter compared with $62 million in the first
    quarter of 2004 and $80 million in the fourth quarter of 2004.
    The overall increase from last year was largely due to
    increases in the interest rate and credit spread, and equity
    price risk categories.

    -- Advisory revenues were $254 million, a 9 percent increase
    from last year's first quarter. Industry-wide completed M&A
    activity was essentially flat over the same period.(3)

    -- Underwriting revenues were $488 million, a 4 percent decline
    from last year's first quarter. Equity underwriting revenues
    fell 36 percent compared with a 15 percent decline in
    industry-wide activity.(3) Fixed income underwriting revenues
    rose 48 percent from a year ago, as compared to a 3 percent
    increase in industry-wide activity.(3) The increase in fixed
    income underwriting revenues reflected higher non-investment
    grade activity.

    -- For the calendar year-to-date, the Company ranked first in
    global IPOs with a 12 percent market share, second in global
    equity and equity-linked issuances with a 13 percent market
    share, third in global debt issuances with a 7 percent market
    share, third in announced global M&A with a 32 percent market
    share and eighth in completed global M&A with an 18 percent
    market share.(4)

    -- Total non-interest expenses were $2.8 billion, a 22 percent
    increase from a year ago. In addition to the litigation
    expense noted above, the quarter's expenses included higher
    compensation and other costs related to increased business
    activity. The quarter's expenses also included $71 million
    related to the lease adjustment.

    INDIVIDUAL INVESTOR GROUP

    The Individual Investor Group posted pre-tax income of $353 million, up 113 percent from $166 million in last year's first quarter. The increase was driven largely by a reduction in non-interest expenses resulting from IIG's allocation of the insurance settlement, which more than offset its lease adjustment. Net revenues increased from a year ago, and reached their highest level in nearly four years. The quarter's pre-tax margin was 29 percent compared to 14 percent a year ago. Excluding the impact of both the insurance settlement and the lease adjustment, the quarter's pre-tax margin was 15 percent.

    -- Total net revenues rose 2 percent to $1.2 billion, driven by
    an 18 percent increase in asset management, distribution and
    administration fees, reflecting higher client asset levels in
    fee-based accounts. This increase was partially offset by a 15
    percent decline in commissions, reflecting lower transaction
    volumes.

    -- Non-interest expenses decreased 15 percent from a year ago to
    $885 million, including a reduction of $198 million from the
    insurance settlement -- partially offset by IIG's lease
    adjustment of $29 million.

    -- Total client assets were $618 billion, a 4 percent increase
    from last year's first quarter. Client assets in fee-based
    accounts rose 16 percent to $166 billion over the past twelve
    months and increased as a percentage of total client assets to
    27 percent from 24 percent over the same period.

    -- At quarter-end, the number of global representatives was
    10,471 -- a decrease of 491 from the beginning of the quarter
    and 361 lower than a year ago. The decrease was largely driven
    by the restructuring of the training program that caused a lag
    in hiring, and consequently, a decline in graduating trainees
    this quarter.

    INVESTMENT MANAGEMENT

    Investment Management's pre-tax income was $287 million, a 69 percent increase from $170 million a year ago. Net revenues increased 8 percent to $696 million, driven by higher investment gains. Non-interest expenses fell 13 percent to $409 million, largely due to a reduction of $43 million from the insurance settlement and a reduction in legal and regulatory costs. The quarter's pre-tax margin was 41 percent. Excluding the Private Equity business and the insurance settlement, the pre-tax margin was 32 percent, compared to 29 percent a year ago.

    -- Assets under management within Investment Management were $427
    billion, up $47 billion, or 12 percent, from the first quarter
    of last year. The increase resulted from both market
    appreciation and positive net flows. Higher management and
    administration fees, driven by the increase in assets under
    management, were offset by a decline in performance and
    distribution fees.

    -- Institutional assets were $226 billion, an increase of $46
    billion from a year ago -- reflecting market appreciation and
    sales of liquidity products. Retail assets of $201 billion
    were $1 billion higher than a year ago.

    -- Among full-service brokerage firms, the Company had the
    highest number of domestic funds (41) receiving one of
    Morningstar's two highest ratings.(5) In addition, the percent
    of the Company's fund assets performing in the top half of the
    Lipper rankings was 79 percent over one year, 72 percent over
    three years and 71 percent over five years.(6)

    -- Investment gains for the quarter were $64 million, up from $9
    million a year ago.

    CREDIT SERVICES

    Credit Services posted record pre-tax income of $380 million on a managed basis, up 4 percent from $365 million a year ago. The earnings increase was driven by a lower provision for loan losses, reflecting lower charge-offs together with a $90 million reduction in the allowance for loan losses -- partially offset by a decline in net interest income, and lower merchant, cardmember and other fees. The pre-tax margin was 38 percent for both the current and year ago quarters.

    -- At quarter end, managed credit card loans of $47.8 billion
    were 1 percent higher than a year ago. Net interest income
    fell $178 million from a year ago, reflecting a narrower
    interest rate spread, which contracted 156 basis points to
    7.79 percent, as a result of both a lower yield and a higher
    cost of funds.

    -- Managed merchant, cardmember and other fees were $479 million,
    down 8 percent from last year, primarily due to lower late
    payment and overlimit fees. The decline in these fees
    reflected the improved credit quality of the portfolio.

    -- Transaction volume increased 7 percent to $25.9 billion, the
    second highest quarterly volume ever.

    -- The managed credit card net charge-off rate for the first
    quarter was 5.11 percent, 120 basis points below a year ago --
    and its lowest level in more than three years. The decrease
    reflects the significant improvement in the card portfolio's
    credit quality.

    -- The managed credit card over-30-day delinquency rate was 4.24
    percent, a decrease of 156 basis points from the first quarter
    of 2004, and lower than anytime since 1995. The managed credit
    card over-90-day delinquency rate was 2.05 percent, 81 basis
    points lower than a year ago.

    -- Discover's acquisition of PULSE EFT Association, Inc. closed
    in January.

    In the first quarter of 2005, the Company repurchased approximately 24 million shares of its common stock. The Company also announced that its Board of Directors declared a $0.27 quarterly dividend per common share. The dividend is payable on April 29, 2005, to common shareholders of record on April 15, 2005.
    Total capital at February 28, 2005 was $122.3 billion, including $31.4 billion of common shareholders' equity and junior subordinated debt issued to capital trusts. Book value per common share was $25.89, 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 28 countries, Morgan Stanley connects people, ideas and capital to help clients achieve their financial aspirations.
    A financial summary follows. Additional financial, statistical and business-related information, as well as business and segment trends, is included in a Financial Supplement. Both the earnings release and the Financial Supplement are available on-line at www.morganstanley.com

    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 "Forward-Looking Statements" immediately preceding Part I, Item 1, "Certain Factors Affecting Results of Operations" under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 and "Competition" and "Regulation" in Part I, Item 1 of the Company's 2004 Annual Report on Form 10-K for the fiscal year ended 2004 and throughout the report.

    (1) The $576 billion in assets under management is composed of:
    Investment Management, $427 billion; Individual Investor
    Group, $127 billion; and Institutional Securities, $22
    billion.

    (2) Represents income from continuing operations before losses
    from unconsolidated investees, taxes and cumulative effect of
    an accounting change.

    (3) Source: Thomson Financial -- for the periods: December 1, 2003
    to February 29, 2004 and December 1, 2004 to February 28,
    2005.

    (4) Source: Thomson Financial -- for the period January 1, 2005 to
    February 28, 2005.

    (5) Full service brokerage firms include: Merrill Lynch, Citigroup
    and Prudential. As of January 31, 2005.

    (6)For the one, three and five year periods ending February 28, 2005.

MORGAN STANLEY Quarterly Financial Summary (unaudited, dollars in millions)

Quarter Ended -------------------------- % Feb 28, 2005 Feb 29, 2004 Change ------------ ------------ ------ Net revenues Institutional Securities $ 3,985 $ 3,504 14% Individual Investor Group 1,238 1,211 2% Investment Management 696 642 8% Credit Services 996 958 4% Intersegment Eliminations (69) (74) 7% ------------ ------------ Consolidated net revenues $ 6,846 $ 6,241 10% ============ ============ Income before taxes (1) Institutional Securities $ 1,145 $ 1,183 (3%) Individual Investor Group 353 166 113% Investment Management 287 170 69% Credit Services 380 365 4% Intersegment Eliminations 24 29 (17%) ------------ ------------ Consolidated income before taxes $ 2,189 $ 1,913 14% ============ ============

Earnings per basic share: (2) Income from continuing operations $ 1.31 $ 1.14 15% Discontinued operations $ 0.01 $ - * Cumulative effect of accounting change (3) $ 0.05 $ - * Earnings per basic share $ 1.37 $ 1.14 20%

Earnings per diluted share: (2) Income from continuing operations $ 1.29 $ 1.11 16% Discontinued operations $ 0.01 $ - * Cumulative effect of accounting change (3) $ 0.05 $ - * Earnings per diluted share $ 1.35 $ 1.11 22%

Average common shares outstanding Basic 1,069.1 1,078.7 Diluted 1,090.2 1,106.0 Period end common shares outstanding 1,103.3 1,097.7

Return on common equity 20.7% 19.2% -------------------------- (1) Represents consolidated income from continuing operations before losses from unconsolidated investees, taxes, dividends on preferred securities subject to mandatory redemption and cumulative effect of accounting change.

(2) Summation of the quarters' earnings per common share may not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year.

(3) Represents the effects of the adoption of SFAS 123(R) in the first quarter of fiscal 2005.

Note: Certain reclassifications have been made to prior period amounts to conform to the current presentation.

MORGAN STANLEY Quarterly Financial Summary (unaudited, dollars in millions)

Quarter Ended -------------------------- % Feb 28, 2005 Nov 30, 2004 Change ------------ ------------ ------ Net revenues Institutional Securities $ 3,985 $ 2,836 41% Individual Investor Group 1,238 1,071 16% Investment Management 696 714 (3%) Credit Services 996 900 11% Intersegment Eliminations (69) (72) 4% ------------ ------------ Consolidated net revenues $ 6,846 $ 5,449 26% ============ ============ Income before taxes (1) Institutional Securities $ 1,145 $ 1,097 4% Individual Investor Group 353 51 * Investment Management 287 231 24% Credit Services 380 279 36% Intersegment Eliminations 24 29 (17%) ------------ ------------ Consolidated income before taxes $ 2,189 $ 1,687 30% ============ ============

Earnings per basic share: (2) Income from continuing operations $ 1.31 $ 1.11 18% Discontinued operations $ 0.01 $ - * Cumulative effect of accounting change (3) $ 0.05 $ - * Earnings per basic share $ 1.37 $ 1.11 23%

Earnings per diluted share: (2) Income from continuing operations $ 1.29 $ 1.09 18% Discontinued operations $ 0.01 $ - * Cumulative effect of accounting change (3) $ 0.05 $ - * Earnings per diluted share $ 1.35 $ 1.09 24%

Average common shares outstanding Basic 1,069.1 1,076.2 Diluted 1,090.2 1,098.3 Period end common shares outstanding 1,103.3 1,087.1

Return on common equity 20.7% 17.4% --------------------------

(1) Represents consolidated income from continuing operations before losses from unconsolidated investees, taxes, dividends on preferred securities subject to mandatory redemption and cumulative effect of accounting change.

(2) Summation of the quarters' earnings per common share may not equal the annual amounts due to the averaging effect of the number of shares and share equivalents throughout the year.

(3) Represents the effects of the adoption of SFAS 123(R) in the first quarter of fiscal 2005.

Note: Certain reclassifications have been made to prior period amounts to conform to the current presentation.

--30--KL/ny*

CONTACT: Morgan Stanley Investor Relations: William Pike, 212-761-0008 Media Relations: Ray O'Rourke, 212-761-4262

KEYWORD: NEW YORK INDUSTRY KEYWORD: BANKING EARNINGS SOURCE: Morgan Stanley

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