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Jeanmarie McFadden
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Investor Relations
William Pike
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For Immediate Release

Morgan Stanley Reports First Quarter Results
Record Net Revenues of $8.5 Billion, Up 24%;
Record Revenues in Institutional Securities, Fixed Income, Prime Brokerage, Discover
NEW YORK, March 22, 2006 -- Morgan Stanley (NYSE: MS) today reported net income for the firstquarter ended February 28, 2006 of $1,636 million, up 17 percent from the first quarter of 2005. Net
revenues (total revenues less interest expense and the provision for loan losses) were a record $8.5
billion, 24 percent above last year’s first quarter. Non-interest expenses of $6.0 billion represented a
27 percent increase from last year, primarily resulting from increased compensation costs. Diluted
earnings per share were $1.54 compared with $1.29 in the first quarter of 2005 and the annualized
return on average common equity for the first quarter was 22.1 percent compared with 19.7 percent a
year ago. Excluding the $395 million1 of incremental compensation expense related to equity awards
to retirement-eligible employees under SFAS 123R discussed below, net income, diluted earnings per
share and annualized return on average common equity would have been $1,901 million, $1.79 and25.7 percent, respectively.

Business Highlights•

Institutional Securities achieved record net revenues of $5.5 billion, up 36 percent from lastyear. Income before taxes rose 63 percent to $1.8 billion.

•

Fixed income achieved record revenues in both sales and trading, and underwriting. Equity
sales and trading revenues were the second highest ever and included record results in Prime
Brokerage.

•

Across Institutional Securities, the Firm allocated additional resources and made key newhires to build businesses where it sees major growth opportunities, including leveraged
finance, international mortgages, prime brokerage and equity derivatives.

•

The Global Wealth Management Group reorganized its management structure, giving its
president direct oversight of the sales force and appointing new regional leadership.
Management’s immediate focus is stabilizing the sales force, attracting and retaining the most

1

These costs were allocated to the business segments as follows: Institutional Securities, $270 million; Global
Wealth Management Group, $80 million; Asset Management, $28 million; and Discover, $17 million.

productive global representatives, enhancing product offerings, and identifying key areas forinvestment.
•

The Asset Management division was reorganized as part of the strategy to enhance growthand improve performance while filling key gaps - particularly in alternatives, institutional andinternational - through organic growth, new hires and bolt-on acquisitions. The division
launched 11 new products during the quarter, including six in its alternative investments
group, and attracted new talent from both inside and outside the Firm.

•

Discover achieved record pre-tax profit reflecting the improvement in credit quality as
anticipated following the spike in bankruptcies in fall 2005. Discover also made progress inthe two areas offering the most attractive growth opportunities - the international andpayments businesses – closing the acquisition of the Goldfish credit card business in the U.K.
and launching the Discover debit product in the U.S.

•

A definitive agreement was signed to sell the Firm’s aircraft leasing business for $2.5 billion
in cash, plus the assumption of liabilities by the buyer.

•

Executing on its strategy in key emerging markets, the Firm strengthened its management
capabilities in Russia, the Middle East, China and the Asian region, and expanded its Middle
East presence with a securities license in Dubai and plans to open two new offices in the
Middle East.

John J. Mack, Chairman and CEO, said, “Morgan Stanley took advantage of a strong market
environment in the first quarter to generate record net revenues and a 22 percent ROE, and we see
substantial opportunities to further improve our performance.

“We are directing resources, capital and people to areas in the institutional securities businesses where
we see the most attractive opportunities, such as emerging markets, leveraged finance, derivatives,principal investments and mortgages. In our retail and asset management businesses, we are making
the necessary changes and investments to fully leverage those franchises. And in our Discover credit
card business, we are pursuing growth opportunities in the international and payments businesses. We
still have a great deal of work to do, and the results of these efforts will not flow to the bottom line allat once. But we are making progress and we remain intensely focused on improving our growth,
profitability and return on equity.”
As previously announced, the results reflect the incremental compensation expense required by SFAS
123R for equity awards granted in the quarter to retirement-eligible employees. This $395 million
expense relates to both 2005 fiscal year-end and other awards, including sign-ons, granted in thequarter and increases the compensation to net revenue ratio for the quarter by 4.7 percentage points.
2

Additionally, based on recent interpretive guidance related to SFAS 123R, the Company has changed
its accounting policy for expensing the cost of equity awards granted to retirement-eligible employees.
The Company will accrue the estimated cost of these awards over the course of the current fiscal year
rather than expensing the awards at the time of grant in December. As a result, the quarter includes anaccrual of $139 million2 for the estimated cost of fiscal 2006 year-end awards that will be granted toretirement-eligible employees.

INSTITUTIONAL SECURITIESInstitutional Securities posted income before taxes3 of $1,754 million, up 63 percent from $1,077
million in the first quarter of 2005. Record net revenues of $5.5 billion were 36 percent higher, driven
by record results in the Company’s fixed income business and strong results in equities and investmentbanking. The quarter’s pre-tax margin was 32 percent, compared with 27 percent in last year’s firstquarter. Excluding the incremental compensation expense noted above, last year’s legal andregulatory charges and the lease accounting adjustment expense,4 the pre-tax margin would have been
approximately 37 percent in both periods.
•

Advisory revenues were $355 million, a 40 percent increase from last year’s first quarter.

•

Underwriting revenues were $548 million, a 12 percent increase from last year’s first quarter.
Fixed income underwriting revenues rose 23 percent from a year ago, to a record $351 million,
and reflected higher levels of investment grade and non-investment grade activity. Equity
underwriting revenues fell 2 percent from a year ago to $197 million.

•

Fixed income sales and trading net revenues were a record $2.7 billion, a 36 percent increase overthe previous record in the first quarter of 2005. The increase was broad-based, with record
revenues in commodities and strong performances across credit products and interest rate &currency products. The higher revenues in commodities were attributable to trading results inelectricity, natural gas and oil liquids. Credit products benefited from the continued tightening in
global credit spreads and strong structured products performance. Interest rate & currency
products, while down from last year, benefited from strong new deal activity with clients andinterest rate, foreign exchange and volatility trading. Revenues in the emerging markets andderivatives businesses were particularly strong.

2

These costs were allocated to the business segments as follows: Institutional Securities, $108 million; Global
Wealth Management Group, $17 million; Asset Management, $8 million; and Discover, $6 million.
3
Represents income from continuing operations before losses from unconsolidated investees, taxes andcumulative effect of an accounting change.
4
The first quarter of 2005 included legal and regulatory charges of $360 million related to theSunbeam/Coleman matter and a $71 million lease accounting adjustment expense.
3•Equity sales and trading net revenues were $1.7 billion, an increase of 36 percent from last year
and the second best quarter on record. Increased client flows across both the cash and derivatives
markets drove revenues higher, particularly in Europe and Asia. Trading revenues in the U.S. andEurope were also significantly higher. Prime Brokerage financed higher client balances for the
12th consecutive quarter, which contributed to record revenues for the business.

•

Investment gains were $284 million compared with $91 million in the first quarter of last year.
Results included gains of $130 million associated with commodities' investment in theIntercontinentalExchange.

•

The Company’s aggregate average trading VaR was $84 million compared with $96 million in thefirst quarter of 2005 and $81 million in the fourth quarter of 2005. Total aggregate average
trading and non-trading VaR was $94 million compared with $105 million in the first quarter of2005 and $92 million in the fourth quarter of 2005.

•

Non-interest expenses were $3.7 billion, a 27 percent increase from a year ago. Compensation
expenses increased, reflecting higher net revenues and the incremental expense noted above. Noncompensation expenses declined as lower charges for legal and regulatory matters more than offset
higher expenses resulting from increased levels of business activity.4

For the first two months of calendar 2006, the Company ranked second in global debt issuance with a
7 percent market share, third in global completed M&A with a 27 percent market share, ninth in global
announced M&A with a 24 percent market share, fourth in global IPOs with a 6 percent market shareand fifth in global equity and equity-related issuances with a 6 percent market share.5

GLOBAL WEALTH MANAGEMENT GROUP (formerly Retail Brokerage)
Global Wealth Management Group’s pre-tax income for the first quarter was $23 million comparedwith $353 million in the first quarter of last year. The quarter's pre-tax margin was 2 percent
compared with 29 percent in last year’s first quarter. The current quarter was negatively affected by
the $80 million incremental compensation expense noted above. Excluding the incremental
compensation expense, and last year’s World Trade Center insurance settlement and the leaseaccounting adjustment expense,6 the pre-tax margin would have been 8 percent in the current quarterversus 15 percent in the first quarter of 2005.

5

Source: Thomson Financial -- for the period January 1, 2006 to February 28, 2006.
The first quarter of 2005 included a $198 million credit for the World Trade Center insurance settlement and a$29 million lease accounting adjustment expense.
4

6

•

Net revenues of $1.3 billion were up 4 percent from a year ago. Asset management, distribution
and administration fees increased on higher client asset levels in fee-based accounts, whilecommissions declined slightly, reflecting lower transaction volumes.

•

Non-interest expenses were up 42 percent to $1.3 billion. Excluding the incremental
compensation expense of $80 million noted above, the World Trade Center insurance settlement
and the lease accounting adjustment expense, non-interest expenses increased 12 percent
compared with the first quarter of 2005, with higher compensation expense and higher costs
associated with legal and regulatory matters.

•

Total client assets were $633 billion, a 2 percent increase from last year’s first quarter. Client
assets in fee-based accounts rose 10 percent to $182 billion over the last 12 months and increased
as a percentage of total assets to 29 percent from 27 percent.

•

The number of global representatives at quarter-end was 9,000 -- a decline of 1,471 from a year
ago, resulting largely from the sales force reduction completed during fiscal 2005 and attrition.

ASSET MANAGEMENT
Asset Management’s pre-tax income was $172 million, a 40 percent decrease from $287 million in thefirst quarter of 2005, which included the World Trade Center insurance settlement.7 The quarter’s pretax margin was 25 percent compared with 41 percent a year ago, or 35 percent excluding the World
Trade Center insurance settlement. Net revenues were flat compared with the first quarter of 2005 as
an increase in revenues from higher assets under management was offset by lower private equity
revenues. Non-interest expenses increased 28 percent to $523 million, reflecting the $28 million
incremental compensation expense noted above and the World Trade Center insurance settlement
recorded in the first quarter of 2005. Excluding results from the private equity business, theincremental compensation expense noted above and last year’s World Trade Center insurance
settlement, pre-tax income declined 2 percent, and the pre-tax margin was 29 percent compared with
32 percent last year.

Assets under management or supervision at February 28, 2006 were $442 billion, up $15 billion, or 4
percent, from a year ago. The increase resulted from market appreciation partly offset by customer
out-flows. Institutional assets rose $15 billion during the first quarter and $21 billion over the past 12
months to $247 billion. Retail assets declined $4 billion during the quarter and $6 billion from a year
ago to $195 billion. The percent of the Company’s long-term fund assets performing in the top half of
the Lipper rankings was 60 percent over one year, 61 percent over three years, 76 percent over five
years and 82 percent over 10 years.

7

The first quarter of 2005 included a $43 million credit for the World Trade Center insurance settlement.
5

DISCOVER
Discover’s first quarter pre-tax income was a record $479 million on a managed basis, up 35 percent
from $354 million in the first quarter of 2005. The quarter’s pre-tax margin was 44 percent comparedwith 37 percent a year ago. Net revenues of $1,089 million were 14 percent higher than last year’s
first quarter. The positive change reflects an increase in the valuation of the Company’s residualinterests in securitized receivables and a reduction in the provision for consumer loan losses, bothresulting from a favorable impact on charge-offs following federal bankruptcy legislation that became
effective in October 2005. The results for the quarter also reflect higher gains on new securitizations.
•

Net sales volume was a record $22.5 billion, an 8 percent increase from a year ago.

•

Managed credit card loans of $47.8 billion were virtually unchanged from a year ago and up 2
percent from the end of last year. The current quarter includes $1.4 billion of managed loans
associated with the acquisition of the Goldfish credit card business in the U.K., which closed on
February 17, 2006.

•

Managed net interest income declined $48 million from a year ago, reflecting a narrowing of theinterest rate spread as a higher yield was more than offset by a higher cost of funds.

•

Managed merchant, cardmember and other fees were $519 million, up 8 percent from a year ago.
The increase was primarily due to higher merchant discount and transaction processing revenues,
partially offset by higher cardmember rewards. The increase in merchant discount revenue wasprimarily driven by record sales activity.

•

The provision for consumer loan losses on a managed basis was $507 million, down 6 percent
from last year. The results for the quarter reflect a provision release of $97 million compared with$90 million in the first quarter of 2005.

•

Non-interest expenses were flat as higher compensation expense was offset by lower marketingcosts.

•

The credit card net charge-off rate was 5.06 percent, 5 basis points lower than last year’s firstquarter and 70 basis points lower than last year’s fourth quarter. The managed credit card over30-day delinquency rate was 3.45 percent, a decrease of 79 basis points from the first quarter of2005. The managed credit card over-90-day delinquency rate was 1.61 percent, 44 basis points
lower than a year ago.

As of February 28, 2006, the Company repurchased approximately 20 million shares of its common
stock since the end of fiscal 2005. The Company also announced that its Board of Directors declared
a $0.27 quarterly dividend per common share. The dividend is payable on April 28, 2006, to commonshareholders of record on April 13, 2006.

6

Total capital as of February 28, 2006 was $134.3 billion, including $33.9 billion of commonshareholders’ equity and junior subordinated debt issued to capital trusts. Book value per commonshare was $28.21, 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 30 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 information regarding business and segment trends, is included in a Financial Supplement.
Both the earnings release and the Financial Supplement are available online in the Investor Relations
section at www.morganstanley.com.

###(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 andwhich are subject to risks and uncertainties that may cause actual results to differ materially. Fora discussion of additional risks and uncertainties that may affect the future results of theCompany, 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, 2005 and in other items throughout the Form
10-K and the Company’s 2006 Current Reports on Form 8-K.

7

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

Quarter Ended
Feb 28, 2005

Feb 28, 2006
Net revenues
Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations

Nov 30, 2005

Percentage Change From:Feb 28, 2005
Nov 30, 2005

$

5,474
1,284
695
1,089
(59)

$

4,015
1,238
696
959
(70)

$

4,154
1,298
890
694
(74)

36%
4%
-14%
16%

32%
(1%)
(22%)
57%
20%

$

8,483

$

6,838

$

6,962

24%

22%

$

1,754
23
172
479
19

$

1,077
353
287
354
24

$

1,576
84
383
65
22

63%
(93%)
(40%)
35%
(21%)

11%
(73%)
(55%)
*
(14%)

$

2,447

$

2,095

$

2,130

17%

15%

Earnings per basic share:
Income from continuing operations
Discontinued operations
Cumulative effect of accounting change (2)Earnings per basic share

$
$
$
$

1.56
0.04
1.60

$
$
$
$

1.26
0.05
1.31

$
$
$
$

1.69
0.70
2.39

24%
*
*
22%

(8%)
(94%)
-(33%)

Earnings per diluted share:
Income from continuing operations
Discontinued operations
Cumulative effect of accounting change (2)Earnings per diluted share

$
$
$
$

1.50
0.04
1.54

$
$
$
$

1.24
0.05
1.29

$
$
$
$

1.64
0.68
2.32

21%
*
*
19%

(9%)
(94%)
-(34%)

Consolidated net revenues
Income before taxes (1)Institutional Securities
Global Wealth Management Group
Asset Management
DiscoverIntersegment Eliminations
Consolidated income before taxes

Average common shares outstanding
Basic
Diluted
Period end common shares outstanding
Return on average common equityfrom continuing operations
Return on average common equity

(1)
(2)
Note:

1,020,041,181
1,061,764,798
1,070,407,513

1,069,097,162
1,090,166,326
1,103,263,369

1,031,343,423
1,063,147,962
1,057,677,994

21.5%
22.1%

20.0%
19.7%

24.9%
34.6%

Represents consolidated income from continuing operations before losses from unconsolidated investees, taxes,
gain/(loss) from discontinued operations and cumulative effect of accounting change.
Represents the effects of the adoption of SFAS 123R in the first quarter of fiscal 2005.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
8

3/20/2006 11:05 AM

MORGAN STANLEY
Quarterly Consolidated Income Statement Information(unaudited, dollars in millions)

Investment banking
Principal transactions:
Trading
Investments
Commissions
Fees:
Asset management, distribution and admin.
Merchant, cardmember and otherServicing and securitizations income
Interest and dividends
Other
Total revenues
Interest expense
Provision for consumer loan losses
Net revenues

Feb 28, 2006

Quarter Ended
Feb 28, 2005

Nov 30, 2005

$

$

$

982

Compensation and benefits
Occupancy and equipment
Brokerage, clearing and exchange fees
Information processing and communications
Marketing and business development
Professional services
Other
September 11th related insurance recoveries, net
Total non-interest expenses
Income from continuing operations before losses
from unconsolidated investees, taxes,
dividends on preferred securities subject tomandatory redemption and cumulative
effect of accounting change
Losses from unconsolidated investees
Provision for income taxes
Income from continuing operations
Discontinued operations
Gain/(loss) from discontinued operations
Income tax benefit/(provision)
Gain/(loss) from discontinued operations
Cumulative effect of accounting change (1)Net income$

Return on average common equityfrom continuing operations
Return on average common equity
Compensation and benefits as a % of net revenues
(1)
Note:

821

1,216

20%

(19%)

3,067
314
929

1,846
153
824

1,575
499
911

66%
105%
13%

95%
(37%)
2%

1,279
289
596
10,549114
18,119
9,481
155
8,483

1,204
308
494
5,843
105
11,598
4,625
135
6,838

1,259
340
294
9,299
132
15,525
8,253
310
6,962

6%
(6%)
21%
81%
9%
56%
105%
15%
24%

2%
(15%)
103%
13%
(14%)
17%
15%
(50%)
22%

4,183
232
292
347
238
434
310
0
6,036

2,854
332
260
342
257
379
570
(251)
4,743

2,672
243
267
365
331
581
373
0
4,832

47%
(30%)
12%
1%
(7%)
15%
(46%)
*
27%

57%
(5%)
9%
(5%)
(28%)
(25%)
(17%)
-25%

2,447
69
784
1,594

2,095
73
673
1,349

2,130
66
318
1,746

17%
(5%)
16%
18%

15%
5%
147%
(9%)

70
(28)
42
0
1,636

7
(3)
4
49
1,402

1,212
(493)
719
0
2,465

*
*
*
*
17%

(94%)
94%
(94%)
-(34%)

21.5%
22.1%
49%

$

$

20.0%
19.7%
42%

Represents the effects of the adoption of SFAS 123R in the first quarter of fiscal 2005.
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
9

Percentage Change From:Feb 28, 2005
Nov 30, 2005

24.9%
34.6%
38%