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| MS > SEC Filings for MS > Form 10-Q on 9-Oct-2008 | All Recent SEC Filings |
9-Oct-2008
Quarterly Report
Introduction.
Morgan Stanley (the "Company") is a global financial services firm that maintains significant market positions in each of its business segments-Institutional Securities, Global Wealth Management Group and Asset Management. The Company, through its subsidiaries and affiliates, provides a wide variety of products and services to a large and diversified group of clients and customers, including corporations, governments, financial institutions and individuals. A summary of the activities of each of the segments follows.
Institutional Securities includes capital raising; financial advisory services, including advice on mergers and acquisitions, restructurings, real estate and project finance; corporate lending; sales, trading, financing and market-making activities in equity and fixed income securities and related products, including foreign exchange and commodities; benchmark indices and risk management analytics; research; and investment activities.
Global Wealth Management Group provides brokerage and investment advisory services covering various investment alternatives; financial and wealth planning services; annuity and other insurance products; credit and other lending products; cash management services; retirement services; and trust and fiduciary services.
Asset Management provides global asset management products and services in equity, fixed income, alternative investments, which includes hedge funds and funds of funds, and merchant banking, which includes real estate, private equity and infrastructure, to institutional and retail clients through proprietary and third-party distribution channels. Asset Management also engages in investment activities.
The discussion of the Company's results of operations below 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 "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, 2007 (the "Form 10-K"), "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2008 Quarterly Reports on Form 10-Q, "Risk Factors" in Part II, Item 1A herein, and other items throughout the Form 10-K, Forms 10-Q and the Company's 2008 Current Reports on Form 8-K.
The Company's results of operations for the quarters and nine month periods ended August 31, 2008 and 2007 are discussed below.
Discontinued Operations.
On June 30, 2007, the Company completed the spin-off (the "Discover Spin-off") of Discover Financial Services ("DFS") to its shareholders. DFS' results are included within discontinued operations for all periods presented through the date of the Discover Spin-off. The results of Quilter Holdings Ltd. ("Quilter"), Global Wealth Management Group's former mass affluent business in the U.K., are also reported as discontinued operations for the first quarter of fiscal 2007. See Note 15 to the condensed consolidated financial statements.
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Results of Operations.
Executive Summary.
Financial Information.
At or for the At or for the
Three Months Ended Nine Months Ended
August 31, August 31,
2008 2007(1) 2008 2007(1)
Net revenues (dollars in millions):
Institutional Securities $ 5,911 $ 4,983 $ 15,749 $ 19,574
Global Wealth Management Group 1,555 1,683 5,597 4,836
Asset Management 647 1,364 1,678 4,241
Intersegment Eliminations (64 ) (72 ) (143 ) (175 )
Consolidated net revenues $ 8,049 $ 7,958 $ 22,881 $ 28,476
Income (loss) before income taxes (dollars
in millions)(2):
Institutional Securities $ 2,183 $ 1,501 $ 4,979 $ 7,296
Global Wealth Management Group (34 ) 287 1,209 777
Asset Management (204 ) 491 (592 ) 1,173
Intersegment Eliminations 3 (14 ) 12 (1 )
Consolidated income before income taxes $ 1,948 $ 2,265 $ 5,608 $ 9,245
Consolidated net income (dollars in
millions) $ 1,425 $ 1,543 $ 4,002 $ 6,797
Earnings applicable to common shareholders
(dollars in millions)(3) $ 1,414 $ 1,526 $ 3,960 $ 6,747
Earnings per basic common share:
Income from continuing operations $ 1.36 $ 1.45 $ 3.83 $ 6.08
Gain on discontinued operations - 0.07 - 0.65
Earnings per basic common share $ 1.36 $ 1.52 $ 3.83 $ 6.73
Earnings per diluted common share:
Income from continuing operations $ 1.32 $ 1.38 $ 3.72 $ 5.79
Gain on discontinued operations - 0.06 - 0.61
Earnings per diluted common share $ 1.32 $ 1.44 $ 3.72 $ 6.40
Regional net revenues (dollars in
millions)(4):
Americas $ 4,637 $ 4,121 $ 11,977 $ 16,242
Europe, Middle East and Africa 2,593 2,405 7,931 8,077
Asia 819 1,432 2,973 4,157
Consolidated net revenues $ 8,049 $ 7,958 $ 22,881 $ 28,476
Statistical Data.
Book value per common share(5) $ 31.25 $ 32.14 $ 31.25 $ 32.14
Average common equity (dollars in
billions)(6):
Institutional Securities $ 21.6 $ 25.1 $ 23.3 $ 22.6
Global Wealth Management Group 1.4 1.7 1.5 1.7
Asset Management 4.2 3.6 3.8 3.3
Total from operating segments 27.2 30.4 28.6 27.6
Discontinued operations - 1.9 - 4.4
Unallocated capital 7.1 3.5 4.2 4.2
Consolidated average common equity $ 34.3 $ 35.8 $ 32.8 $ 36.2
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Statistical Data-(Continued).
At or for the At or for the
Three Months Ended Nine Months Ended
August 31, August 31,
2008 2007(1) 2008 2007(1)
Return on average common equity(6):
Consolidated 16 % 17 % 16 % 25 %
Institutional Securities 29 % 16 % 20 % 29 %
Global Wealth Management Group N/M 39 % 70 % 37 %
Asset Management N/M 35 % N/M 30 %
Effective income tax rate from continuing
operations 27.1 % 34.4 % 29.0 % 33.0 %
Worldwide employees 46,383 47,713 46,383 47,713
Average liquidity (dollars in
billions)(7):
Parent company liquidity $ 81 $ 49 $ 75 $ 44
Bank and other subsidiary liquidity 94 44 69 30
Total liquidity $ 175 $ 93 $ 144 $ 74
Capital ratios(8):
Total capital ratio 19.0 % - 19.0 % -
Tier 1 ratio 12.7 % - 12.7 % -
Consolidated assets under management or
supervision by asset class (dollars in
billions):
Equity(9) $ 288 $ 333 $ 288 $ 333
Fixed income(9) 265 227 265 227
Alternatives(10) 70 63 70 63
Private Equity 3 3 3 3
Infrastructure 4 1 4 1
Real Estate 37 34 37 34
Subtotal 667 661 667 661
Unit trusts 12 15 12 15
Other(9) 50 57 50 57
Total assets under management or
supervision(11) 729 733 729 733
Share of minority interest assets(12) 7 6 7 6
Total $ 736 $ 739 $ 736 $ 739
Institutional Securities:
Mergers and acquisitions completed
transactions (dollars in billions)(13):
Global market volume $ 201.7 $ 249.7 $ 424.5 $ 768.6
Market share 30.4 % 25.8 % 24.4 % 31.6 %
Rank 3 2 5 1
Mergers and acquisitions announced
transactions (dollars in billions)(13):
Global market volume $ 163.8 $ 327.7 $ 389.9 $ 1,043.9
Market share 18.3 % 28.4 % 19.3 % 34.9 %
Rank 6 2 5 1
Global equity and equity-related issues
(dollars in billions)(13):
Global market volume $ 16.7 $ 19.5 $ 40.5 $ 44.6
Market share 10.5 % 8.1 % 9.7 % 7.8 %
Rank 2 3 3 4
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Statistical Data-(Continued).
At or for the At or for the
Three Months Ended Nine Months Ended
August 31, August 31,
2008 2007(1) 2008 2007(1)
Global debt issues (dollars in
billions)(13):
Global market volume $ 39.6 $ 86.7 $ 148.3 $ 277.0
Market share 4.2 % 5.1 % 4.4 % 5.6 %
Rank 10 8 8 5
Global initial public offerings (dollars in
billions)(13):
Global market volume $ 0.7 $ 6.5 $ 4.9 $ 14.5
Market share 3.0 % 8.2 % 5.6 % 7.8 %
Rank 9 3 7 2
Pre-tax profit margin(14) 37 % 30 % 32 % 37 %
Global Wealth Management Group:
Global representatives 8,500 8,341 8,500 8,341
Annualized net revenue per global
representative (dollars in thousands)(15) $ 741 $ 817 $ 769 $ 796
Client assets by segment (dollars in
billions):
$10 million or more $ 223 $ 228 $ 223 $ 228
$1 million - $10 million 261 265 261 265
Subtotal $1 million or more 484 493 484 493
$100,000 - $1 million 171 182 171 182
Less than $100,000 22 24 22 24
Client assets excluding corporate and other
accounts 677 699 677 699
Corporate and other accounts 30 35 30 35
Total client assets $ 707 $ 734 $ 707 $ 734
Fee-based assets as a percentage of total
client assets(16) 26 % 29 % 26 % 29 %
Client assets per global representative
(dollars in millions)(17) 83 88 83 88
Bank deposits (dollars in millions)(18) $ 36,036 $ 19,409 $ 36,036 $ 19,409
Pre-tax profit margin(14) N/M 17 % 22 % 16 %
Asset Management:
Assets under management or supervision
(dollars in billions)(19) $ 570 $ 577 $ 570 $ 577
Percent of fund assets in top half of Lipper
rankings(20) 34 % 41 % 34 % 41 %
Pre-tax profit margin(14) N/M 36 % N/M 28 %
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N/M - Not Meaningful
(1) Certain prior-period information has been reclassified to conform to the current period's presentation.
(2) Amounts represent income from continuing operations before gains (losses) from unconsolidated investees, income taxes and gain from discontinued operations.
(3) Earnings applicable to common shareholders are used to calculate earnings per share information. The quarters ended August 31, 2008 and 2007 reflect a preferred stock dividend of $11 million and $17 million, respectively. The nine month periods ended August 31, 2008 and 2007 reflect a preferred stock dividend of $42 million and $50 million, respectively.
(4) Reflects the regional view of the Company's consolidated net revenues, on a
managed basis, based on the following methodology: Institutional Securities:
investment banking-client location, equity capital markets-client location,
debt capital markets-revenue recording location, sales and trading-trading
desk location. Global Wealth Management Group: global representative coverage
location. Asset Management: client location, except for the merchant banking
business, which is based on asset location.
(5) Book value per common share equals common shareholders' equity of $34,665 million at August 31, 2008 and $34,150 million at August 31, 2007, divided by common shares outstanding of 1,109 million at August 31, 2008 and 1,062 million at August 31, 2007.
(6) The computation of average common equity for each business segment is based upon an economic capital framework that estimates the amount of equity capital required to support the businesses over a wide range of market environments while simultaneously satisfying regulatory, rating agency and investor requirements. The economic capital framework will evolve over time in response to changes in the
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(7) For a discussion about average liquidity, see "Liquidity and Capital Resources-Liquidity Reserves" herein.
(8) For a discussion about capital ratios, see "Liquidity and Capital Resources-Regulatory Requirements" herein.
(9) Equity and fixed income amounts include assets under management or supervision associated with the Asset Management and Global Wealth Management Group business segments. Other amounts include assets under management or supervision associated with the Global Wealth Management Group business segment.
(10) Amounts reported for Alternatives include the Company's invested equity in those funds and include a range of alternative investment products such as hedge funds, funds of hedge funds and funds of private equity funds.
(11) Revenues and expenses associated with these assets are included in the Company's Asset Management, Global Wealth Management Group and Institutional Securities business segments.
(12) Amounts represent Asset Management's proportional share of assets managed by entities in which it owns a minority interest.
(13) Source: Thomson Reuters, data as of August 31, 2008 (generated on September 3, 2008)-The data for the quarters ended August 31, 2008 and 2007 are for the periods from June 1 to August 31, 2008 and June 1 to August 31, 2007, respectively. The data for the nine month periods ended August 31, 2008 and 2007 are for the periods from January 1 to August 31, 2008 and January 1 to August 31, 2007, respectively, as the industry standard is to view this data on a calendar-year basis.
(14) Percentages represent income from continuing operations before gains (losses) from unconsolidated investees and income taxes, as a percentage of net revenues.
(15) Annualized net revenue per global representative amounts equal Global Wealth Management Group's net revenues (excluding the sale of Morgan Stanley Wealth Management S.V.) divided by the quarterly average global representative headcount for the periods presented.
(16) The decline in fee-based assets as a percent of total client assets largely reflected the termination on October 1, 2007 of the Company's fee-based (fee-in-lieu of commission) brokerage program pursuant to a court decision vacating a Securities and Exchange Commission ("SEC") rule that permitted fee-based brokerage. Client assets that were in the fee-based program primarily moved to commission-based brokerage accounts, or at the election of some clients, into other fee-based advisory programs, including Morgan Stanley Advisory, a nondiscretionary account launched in August 2007.
(17) Client assets per global representative equal total period-end client assets divided by period-end global representative headcount.
(18) Bank deposits are held at certain of the Company's Federal Deposit Insurance Corporation (the "FDIC") insured depository institutions for the benefit of retail clients through their accounts.
(19) Amounts include Asset Management's proportional share of assets managed by entities in which it owns a minority interest.
(20) Source: Lipper, one-year performance excluding money market funds as of August 31, 2008 and 2007, respectively.
Financial Holding Company. On September 21, 2008, the Company obtained approval from the Board of Governors of the Federal Reserve System (the "Fed") to become a bank holding company upon the conversion of its wholly owned indirect subsidiary, Morgan Stanley Bank (Utah), from a Utah industrial bank to a national bank. On September 23, 2008, the Office of the Comptroller of the Currency (the "OCC") authorized Morgan Stanley Bank (Utah) to commence business as a national bank, operating as Morgan Stanley Bank, N.A. Concurrent with this conversion, the Company became a financial holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company sought this new status from the Fed to provide the Company maximum flexibility and stability to pursue new business opportunities as the financial marketplace undergoes rapid and profound changes. The Company will pursue initiatives to expand the retail banking services it offers its retail clients and build a stable base of core deposits. The Company has more than 3 million retail accounts and its subsidiary depository institutions had $36 billion in bank deposits as of August 31, 2008. The Company has become subject to the supervision and regulation of the Fed and Morgan Stanley Bank, N.A. has become subject to the consolidated supervision and regulation of the OCC. The Federal Deposit Insurance Corporation ("FDIC") will continue to insure deposits at Morgan Stanley Bank, N.A. and Morgan Stanley Trust FSB to the maximum extent allowed by the FDIC. See "Financial Holding Company Status" herein for a further discussion. The Company does not expect significant adverse tax or accounting effects from this new status.
Mitsubishi UFJ Financial Group, Inc. On September 29, 2008, the Company reached a definitive agreement under which Mitsubishi UFJ Financial Group, Inc. ("MUFG") would invest $9 billion in equity securities of the Company representing a 21% interest on a fully diluted basis. See Note 17 to the condensed consolidated financial statements for a further description of terms of the agreement. The Company and MUFG have also agreed to pursue a global strategic alliance and have identified numerous areas of collaboration, including asset management, capital markets and corporate and retail banking. On October 7, 2008, the Company announced that the parties had received key regulatory clearances for the transaction, including approval by the Fed and other key global regulators, and "early termination" under the Hart-Scott-Rodino Act.
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The transaction is expected to close promptly after the expiration of the mandatory five-day waiting period following the Fed approval on October 6, 2008. Upon closing, MUFG has the right to nominate a representative for election to the Company's Board of Directors (the "Board") and the right to one observer on the Board.
Third Quarter 2008 Performance.
Company Results. The Company recorded net income of $1,425 million in the quarter ended August 31, 2008, an 8% decrease from the comparable fiscal 2007 period. Results for the quarter ended August 31, 2008 included a pre-tax gain of $731 million related to a secondary offering of MSCI Inc. (see Note 16 to the condensed consolidated financial statements). Net revenues (total revenues less interest expense) increased 1% to $8,049 million as challenging market conditions negatively affected the current quarter's results. Non-interest expenses of $6,101 million increased 7% from the third quarter of last year primarily due to a $288 million charge related to the announced buy-back program of auction rate securities. Diluted earnings per share were $1.32 compared with $1.44 in last year's third quarter. Compensation and benefits expense increased 3%. Diluted earnings per share from continuing operations were $1.32 compared with $1.38 in last year's third quarter. The annualized return on average common equity from continuing operations was 16.5% compared with 17.2% in the third quarter of last year.
For the nine month period ended August 31, 2008, net income was $4,002 million, a 41% decrease from $6,797 million a year ago. Net revenues decreased 20% to $22,881 million and non-interest expenses decreased 10% to $17,273 million. Diluted earnings per share were $3.72 compared with $6.40 a year ago. The annualized return on average common equity from continuing operations for the nine month period was 16.1% compared with 25.5% in the prior-year period. Results for the nine month period ended August 31, 2008 included a pre-tax gain of $1,463 million related to the secondary offerings of MSCI Inc. and a pre-tax gain of $687 million related to the sale of Morgan Stanley Wealth Management S.V., S.A.U. ("MSWM S.V.") (see Note 16 to the condensed consolidated financial statements). Results for the nine month period ended August 31, 2007 included a gain of $168 million ($109 million after-tax) in discontinued operations related to the sale of Quilter on February 28, 2007 (see Note 15 to the condensed consolidated financial statements).
The Company's effective income tax rate from continuing operations was 27.1% and 29.0% for the quarter and nine month period ended August 31, 2008 compared with 34.4% and 33.0% for the quarter and nine month period ended August 31, 2007, respectively. The decrease in the effective rate in the quarter primarily reflected a change in the geographic mix of earnings. The decrease in the effective rate in the nine month period primarily reflected a change in the geographic mix of earnings and a lower level of earnings.
At August 31, 2008, the Company had 46,383 employees worldwide compared with 47,713 at the end of the third quarter of last year and 48,256 at November 30, 2007.
Institutional Securities. Institutional Securities recorded income from continuing operations before gains (losses) from unconsolidated investees and income taxes of $2,183 million, a 45% increase from last year's third quarter. Net revenues increased 19% to $5,911 million primarily due to strong results from equity sales and trading activities and the pre-tax gain of $731 million related to a secondary offering of MSCI Inc. Sales and trading revenues also benefited by approximately $1.5 billion from the widening of the Company's credit spreads on certain long-term and short-term borrowings that are accounted for at fair value. Non-interest expenses increased 7% to $3,728 million from last year's third quarter, reflecting higher compensation costs, partially offset by lower brokerage and clearing expenses and other business-related activities.
Investment banking revenues decreased 28% from the third quarter of fiscal 2007 to $1,032 million, reflecting declines in industry-wide activity resulting in lower revenues from merger, acquisition and restructuring activities and lower revenues from fixed income and equity underwriting transactions. Advisory fees from merger, acquisition and restructuring transactions were $401 million, a decrease of 40% from the comparable period of fiscal 2007. Underwriting revenues decreased 19% to $631 million.
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