Financial Controls: Morgan Stanley Reports Improved Q2 Operating Results (Financial Charts) *Common shareholders receive a loss* MS

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Morgan Stanley reported Q2 2011 financial results on Thursday, July 21, 2011

* Charts and commentary haven been updated for Morgan Stanley Q2 June 2011 financial results *

Morgan Stanley Reports Improved Q2 Operating Results: Common shareholders receive a loss

Morgan Stanley Summary Q2 2011 Morgan Stanley Q2 2011 operating results were improved, but common shareholders took a loss per share of -$0.38. The $1.7 billion one-time charge, "negative adjustment", to common shareholders was from the conversion of Mitsubishi UFJ Financial Group preferred shares to common shares. This was done to eliminate future preferred dividends. The $1.7 billion charge was to capital, retained earnings, and not recorded on the income statement but was included in the earnings (loss) available to common shareholders and earnings (loss) per share calculations. Hence the loss per common share resulted. Without the one-time charge, earnings per share would have been $0.47, which is adequate, but not impressive. If operating profitability and margin continues at present levels and possibly improves, common shareholders should begin to recoup the loss in future quarters.

Morgan Stanley Income Statement Q2 2011 Morgan Stanley reported net revenues of $9.28B, net income of $1.19B, and loss per share of -$0.38. From the prior quarter Q1 2011, net revenues were up +21.57%, net income up +23.24%, and earnings per share down -176.00%. From the prior year Q2 2010, net revenues were up +16.71%, net income down -39.13%, and earnings per share down -134.86%, respectively. The operating margin of 20.94% more than doubled and the net margin of 12.85% edged up QoQ.

Morgan Stanley Balance Sheet Q2 2011 Tier 1 capital increased to 16.8% which is adequate and a multi-year high. Financial position is 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 Loss per Share of -$0.38 included a -$1.09 per share loss due to a negative adjustment for the conversion of preferred shares to common shares by shareholder Mitsubishi UFJ Financial Group. Exclusive of this one-time charge, EPS was +$0.47, which is adequate, but not impressive.

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 $9.28B are a multi-year high and showed general growth across revenue categories, except for commissions. Current Operating Income of $1.94B is a strong 5-quarter high and more than double the prior Q1 2011 of $872M. Current Net Income of $1.19B is also strong with a 5-quarter high and improvement from prior Q1 2011 of $968M.

Morgan Stanley Operating Margin and Net Margin (Chart) Below is a chart of quarterly operating margin and net margin. Current Operating Margin of 20.94% rebounded to a 4-quarter high and a significant increase over the prior Q1 2011 of 11.42%. Current Net Margin of 12.85% is also a 4-quarter high and edged up from the prior Q1 2011 of 12.68%.

Morgan Stanley Capital to Assets Ratio and Tier 1 Capital Ratio (Chart) Below is a chart of the capital to assets ratio and Tier 1 capital ratio. The capital to assets ratio is the stockholders' equity to total assets ratio. The Tier 1 capital ratio is a financial regulatory ratio and measurement. The current Capital to Assets Ratio will be posted later. The Tier 1 Capital Ratio of 16.80% is adequate and a multi-year high.

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 $9.35B is a multl-year high and and showed general growth across revenue categories, except for commissions. Current Net Interest Loss of -$72M, which is immaterial, is the 2nd quarterly decline and first loss since Q2 2009. Current NonInterest Expense, operating expenses, of $7.34B increased to a multi-year high due to "higher levels of business activity and initial costs of Chinese securities joint venture with Huaxin Securities".

Morgan Stanley Growth Rates (Chart) Below is a chart of the quarterly (QoQ, Q/Q, quarterly change) growth rates for net revenues and earnings per share. Net revenues and earnings per share have been volatile and erratic. Current Net Revenues of +21.57% are the best improvement since Q1 2010 of +32.64% and has ranged from -123% to +79% on the chart. Current Earnings per Share of -176.00% reflects the one-time charge discussed above in this post and has ranged from -176% to +686% on the chart.

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 64.87% decreased to a 5-quarter low from the prior Q1 2011 very high 71.28%. Current total revenues increased faster than current noninterest expense, 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.

Morgan Stanley Reports Second Quarter 2011

* Net Revenues of $9.3 Billion:

* Highest Reported Ever in Fixed Income Underwriting

* Highest Reported in M&A and Equity Sales & Trading Since the Financial Crisis

* Solid Performance Across Other Businesses

* Net Loss of $0.38 per Diluted Share Included Negative Adjustment of $1.02 Related to the Previously Announced Conversion of the Firm’s Preferred Stock Held by Mitsubishi UFJ Financial Group, Inc.

* Morgan Stanley’s Tier 1 Common Ratio Increased 290 Basis Points During the Quarter to 14.6%, an Industry Leading Level

NEW YORK, July 21, 2011 – Morgan Stanley (NYSE: MS) today reported net revenues of $9.3 billion for the second quarter ended June 30, 2011 compared with $8.0 billion a year ago. Results for the current quarter included positive revenue of $244 million compared with positive revenue of $750 million a year ago related to changes in Morgan Stanley’s debt-related credit spreads (Debt Valuation Adjustment, DVA). For the current quarter, income from continuing operations applicable to Morgan Stanley was $1.2 billion compared with $1.4 billion in the prior year quarter. The earnings per share calculation for the current quarter included a negative adjustment of approximately $1.7 billion, or $1.02 per diluted share, related to the previously announced conversion of the Firm’s Series B Preferred Stock, held by Mitsubishi UFJ Financial Group, Inc. (MUFG), into common stock. After considering this negative adjustment, the Firm reported a loss of $0.38 per diluted share, from continuing operations applicable to Morgan Stanley for the current quarter compared with income of $0.80 per diluted share, for the same period a year ago. The Firm’s current quarter compensation to net revenue ratio was 50% with compensation expense of $4.7 billion reflecting an increase in net revenues from a year ago.

Non-compensation expenses of $2.7 billion reflected higher levels of business activity and the initial costs associated with the previously announced Chinese securities joint venture with Huaxin Securities Co. Ltd.

For the current quarter, the net loss applicable to Morgan Stanley, including discontinued operations, was $0.38 per diluted share, compared with net income of $1.09 per diluted share in the second quarter of 2010.

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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