Financial Controls: Morgan Stanley Reports Lackluster Earnings (Charts, Video) *Core, continuing operations EPS $0.02* MS

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Morgan Stanley reported Q3 2011 financial results on October 19, 2011

* Charts and commentary haven been updated for Morgan Stanley Q3 2011 financial results *

Morgan Stanley Reports Lackluster Earnings: Core, continuing operations EPS $0.02

Morgan Stanley Summary Q3 2011 Morgan Stanley financial performance was inflated by a +$3.4 billion Debt Valuation Adjustment, an unrealized gain, which was recorded in revenues. This DVA inflated net revenues, operating income, net income, earnings per share, operating margin, and net margin. Earnings per share were reported as $1.15, including the DVA of +$1.12 and discontinued operations of +$0.01. This results in an earnings per share from core, continuing operations of a lackluster $0.02. Morgan Stanley has yet to prove the core business can sustain growth and investor confidence.

Morgan Stanley Income Statement Q3 2011 Morgan Stanley reported net revenues of $9.89 billion, net income of $3.68 billion, and earnings per share of $1.15. From the prior quarter Q2 2011, net revenues were up +6.57%, net income up +84.33%, and earnings per share up +402.63%. From the prior year Q3 2010, net revenues were up +45.92%, net income up +1578.63%, and earnings per share up +1742.86%, respectively. Both the operating margin of 37.18% and the net margin of 22.23% increased QoQ and YoY.

Morgan Stanley Balance Sheet Q3 2011 The current Capital to Assets Ratio has been historically inadequate. The Tier 1 Capital Ratio and Tier 1 Common Ratio of 15.10% and 13.10%, respectively, are adequate. More commentary will be posted about the Morgan Stanley financial position at a later date.

Morgan Stanley Financial Performance by the Quarters (Charts)

Morgan Stanley Earnings per Share (Chart) Below is a chart of quarterly earnings per diluted share. Current Earnings per Share of $1.15 included a $1.12 per share gain due to a positive Debt Value Adjustment. Exclusive of this DVA, EPS was +$0.03, including a $0.01 per share gain from discontinued operations, which is lackluster. That results in an EPS of $0.02 from core, continuing operations. The chart average EPS is $0.24.

Morgan Stanley Net Revenues, Operating Income, Net Income (Chart) Below is a chart of quarterly net revenues, operating income, and net income. Consolidated revenues are reported net of interest expense. Current Net Revenues of $9.89 billion which included a $3.4 billion Debt Valuation Adjustment. Current Operating Income of $3.68 billion includes the $3.4 billion DVA. Current Net Income of $2.199 billion would be a net loss of -$1.2 billion without the $3.4 billion DVA. The NR, OI, and NI chart averages are $7.44 billion, $1.24 billion, and $946 million, respectively.

Morgan Stanley Operating Margin and Net Margin (Chart) Below is a chart of quarterly operating margin and net margin. Current Operating Margin of 37.18% and the current Net Margin of 22.23% are inflated by the DVA discussed on the charts above. The OM and NM chart averages are 12.69% and 10.85%, respectively.

Morgan Stanley Tier 1 Capital, Tier 1 Common, and Capital to Assets Ratios (Chart) Below is a chart of the Tier 1 capital, Tier 1 common, and capital to assets ratio. The capital to assets ratio is the stockholders' equity to total assets ratio. The Tier 1 capital and Tier 1 common ratios are financial regulatory ratios and measurements. The current Capital to Assets Ratio will be posted later, but has been historically inadequate. The Tier 1 Capital Ratio and Tier 1 Common Ratio of 15.10% and 13.10%, respectively, are adequate. The chart averages for T1 Capital, T1 Common, and Capital ratios are 15.99%, 10.80%, and 6.99%, respectively.

Morgan Stanley Income Statement Components (Chart) Below is a chart of the major income statement components: NonInterest Revenue, Net Interest Income, and NonInterest Expense. NonInterest Revenue is the primary driver of Net Revenues and ultimately Net Income. Current NonInterest Revenue of $9.75 billion is inflated by the $3.4 billion Debt Valuation Adjustment which results in a multi-year high. Current NonInterest Expense, operating expenses, of $6.21 billion is a 4-quarter low and a positive. Current Net Interest Income of $140 million, which is immaterial, is near the historical average. The chart averages for NIR, NIE, and NII are $7.28 billion, $6.20 billion, and $159 million, respectively.

Morgan Stanley Growth Rates (Chart) Below is a chart of the annual (YoY, Y/Y, annual change) growth rates for revenues and earnings per share. Net revenues and earnings per share have been volatile and erratic. Current Net Revenues Growth of +45.92% increased significantly due to the +$3.4 billion DVA. Current Earnings per Share Growth of +1742.86% literally exploded upwards of the charts as a result of the positive DVA adjustment. The NRG and EPSG chart averages are 8.67% and 81.91%, respectively.

Morgan Stanley Operating Expense Ratio (Chart) Below is a chart of the operating expense ratio (NonInterest Expense divided by Total Revenues which are NonInterest Income and Interest Income). The current Operating Expense Ratio of 54.03% decreased to a multi-year low as operating expenses appear to be contained. Current total revenues increased and noninterest expense decreased by over $1 billion, resulting in a lower operating expense ratio. An smaller share of each dollar of revenues is being spent on operating expenses. Ultimately a continuation of this uptrend will increase profitability and already has. The OER chart average is 68.76%.

Morgan Stanley Reports Third Quarter 2011

 Net Revenues of $9.9 Billion; Income from Continuing Operations of $1.14 per Diluted Share

 Highest Reported Ever in Fixed Income Underwriting

 Results Included Revenues of $3.4 Billion, or $1.12 per Diluted Share, from the Widening of Morgan Stanley’s Debt-Related Credit Spreads

NEW YORK, October 19, 2011 – Morgan Stanley (NYSE: MS) today reported income of $2.2 billion, or $1.14 per diluted share, from continuing operations applicable to Morgan Stanley for the third quarter ended September 30, 2011 compared with income of $314 million, or $0.05 per diluted share, for the same period a year ago. Net revenues were $9.9 billion for the current quarter compared with $6.8 billion a year ago. Results for the current quarter included positive revenue of $3.4 billion, or $1.12 per diluted share, compared with negative revenue of $731 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads and other credit factors (Debt Valuation Adjustment, DVA).

The Firm’s compensation expense for the current quarter was $3.7 billion with a compensation to net revenue ratio of 37%. This ratio was affected by DVA which increased net revenues in the current period. Noncompensation expenses of $2.5 billion reflected higher levels of business activity and costs associated with the U.K. bank levy.

For the current quarter, net income applicable to Morgan Stanley, including discontinued operations, was $1.15 per diluted share, compared with a net loss of $0.07 per diluted share in the third quarter of 2010.

James P. Gorman, President and Chief Executive Officer, said, "Morgan Stanley effectively navigated turbulent markets while consolidating our market share gains with Institutional clients and demonstrating resilience across the Global Wealth Management business as evidenced by record net new assets flows since the formation of MSSB. The Firm delivered progress across many of our key initiatives, increasing client penetration in equity derivatives and interest rate products as well as achieving a significant milestone in the integration of MSSB with the initial roll out of our new technology platform. With our robust liquidity, diverse funding, strong capital and unique strategic partnership with MUFG, Morgan Stanley is well positioned to deliver for clients in the long term.”

About Morgan Stanley

Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm's employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 42 countries. For further information about Morgan Stanley, please visit http://www.morganstanley.com/.

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