Morgan Stanley Annual Report 2003
For a more complete discussion of our 2003 results, please refer to our Annual Report on Form 10-K and visit us online at https://www.wendangku.net/doc/148577319.html,.
“Client focus has become the foundation of everything we do… engraved in our culture throughout the firm.”Philip J. Purcell
Chairman & Chief Executive Officer, Morgan Stanley
recognition
Euromoney Magazine
— Best Global Investment Bank
— Best Global Equity-Linked House
— Best Overall Bank in Electronic Equities BusinessWeek Magazine
— Top 100 Brands
Nikkei Japan Annual Fixed Income Research Poll
— Top-Ranked Credit Analysts International Financing Review
— U.S. Equity House of the Year
— U.S. Dollar Investment-Grade Corporate Bond House of the Year
— U.S. Securitization House of the Year Greenwich Associates
— Best Overall Equity Sales, Research and Trading Services
Wall Street Journal
— #1 “Best on the Street” Analyst Survey Risk Magazine
— Derivatives House of the Year Reuters Institutional Investor Report — #1 Pan-European Trading & Execution
1
letter to shareholders
from Philip J. Purcell
In 2003, as the securities markets ended a three-year slide, your company
delivered strong business results and established positive momentum for
the future. I believe we performed very well in each of the key areas set out
as priorities in last year’s annual report: profitability, market share, brand
and the quality of our people.
Net income increased 27% to $3.8 billion, and return on equity
increased from 14.1% to 16.5% —both excellent given the weak first-half
business environment. Your stock price increased 45%, and dividends were
raised 9% to an annual rate of $1.00 per share.
Our market share performance was very strong in our securities business,
with rankings higher or equal to last year’s in almost every major category.
I believe this performance indicates our client-focused strategy is working.
Brand strength changes little year over year, but, as in the case of our
market share performance, I believe there was discernible improvement.
This past year, our awards for being “best in class” included: Best Global
Investment Bank —Euromoney magazine; U.S. Equity House of the
Year —International Financing Review; Derivatives House of the Year —
Risk magazine; 100 Best Companies to Work For —Sunday Times (U.K.);
and Top 50 Companies for Diversity —DiversityInc magazine.
The continued innovation and intellectual leadership of the people of
Morgan Stanley were high points for the year. To cite just three of many
possible examples, we led General Motors’ $17 billion global debt and equity
offering in June, reopened the IPO markets for Chinese financial companies
and led the offering for PICC in October, and closed the year by advising
FleetBoston Financial in its $47 billion merger with Bank of America.
In each of these transactions, as in the successes in all our businesses,
we were able to build on a close and trusted relationship with our clients.
Client focus has become the foundation of everything we do, and that’s
why we have chosen to highlight that strategy in this year’s report.
Let me begin, however, by discussing our financial and market share
performance, both of which are the result of that strategy.
Morgan Stanley Annual Report 2003
2Net Income
(Dollars in Millions)
6
5
4
3
2
1
$3,787
$2,988
$3,521
$5,456
$4,791
2003
2002
2001
2000
1999
financial results
Return on Equity
(In Percent)
32
24
16
8
16.5%
14.1%
18.0%
30.9%
32.6%
2003
2002
2001
2000
1999
Earnings per Share
(Diluted)
5
4
3
2
1
$3.45
$2.69
$3.11
$4.73
$4.10
2003
2002
2001
2000
1999
Business Drivers
1999 2000 2001 2002 2003
S&P 500 1,389 1,315 1,139 936 1,058
DOW 10,878 10,415 9,852 8,896 9,782
NASDAQ VOLUME ($B) 9,478 19,928 11,609 7,524 6,866
NYSE VOLUME ($B) 8,788 10,945 10,623 10,412 9,510
GLOBAL IPO VOLUME ($B) 161 221 83 76 45
GLOBAL EQUITY UNDERWRITING VOLUME ($B)1497 645 410 360 356
GLOBAL INVESTMENT GRADE VOLUME ($B) 1,635 1,638 1,885 1,639 1,924
GLOBAL COMPLETED M&A $ VOLUME ($B)2 2,250 3,403 2,280 1,218 1,030
GLOBAL ANNOUNCED M&A $ VOLUME ($B)23,082 3,240 1,593 1,074 1,183
1 I ncludes equity-related underwriting
2 C ompleted and announced M&A data is for transactions of $100MM or more
Sources: FIBV, Factset and Thomson Financial
S&P 500 Index and MSCI World Index
1,500
1,300
1,100
900
700
3
/
9
9
6
/
9
9
9
/
9
9
1
2
/
9
9
3
/
6
/
9
/
1
2
/
3
/
1
6
/
1
9
/
1
1
2
/
1
3
/
2
6
/
2
9
/
2
1
2
/
2
3
/
3
6
/
3
9
/
3
1
2
/
3
Source: Factset
S&P Index (Last Five Calendar Years)
MSCI World Index (Last Five Calendar Years)
Competitive Return on Equity Comparison — 2003
20
15
10
5
19.8%
C
18.2%
LEH
16.5%
MWD
16.1%
MER
16.0%
JPM
15.0%
GS
C: Citigroup LEH: Lehman Brothers MWD: Morgan Stanley
MER: Merrill Lynch JPM: JPMorgan Chase GS: Goldman Sachs
Source: Company Filings
“Product excellence
and technical skills are essential to our success. They are necessary, but they are not sufficient. What we truly prize is the quality of the relationships we build with our clients. That is what gets us the first call when a client has a problem that needs a solution and the last call after he has surveyed the competition.”
Stephan F. Newhouse
President,
Morgan Stanley
recognition
Sunday Times (U.K.)
— 100 Best Companies to Work For Working Mother Magazine
— Best Companies for Working Mothers Essence Magazine
— Outstanding Companies for Black Women LATINA Style Magazine
— 50 Best Companies to Work for in the U.S. Asian Enterprise Magazine
— Top Companies for Asian-Americans
The National Business & Disability Council — Employer of the Year
Family Digest
— Best Companies for African-Americans Hispanic Magazine
— 100 Companies Providing the
Most Opportunities to Hispanics Hispanic Network Magazine
— Top Corporations for Supplier Diversity DiversityInc Magazine
— Top 50 Companies for Diversity Business Committee for the Arts
— B usiness in the Arts Award for Innovation The Harlem School of the Arts
— Dorothy Maynor Corporate Citizen of the Year Award
Morgan Stanley Annual Report 2003
32003 financial results
Our consolidated financial performance for the year was strong. Revenues
were up 9%, the first increase in revenues since 2000. While higher
revenues reflected, in part, a better environment, I believe our focus on
improving our market share with clients also contributed to the stronger
performance. Profits before tax were up 22% as a result of our focus on
costs in addition to the growth in revenues. Net income increased 27%,
and earnings per share increased 28%.
Looking behind consolidated results to the particular businesses,
Institutional Securities drove the increase in profits for the firm as a whole.
In particular, fixed income had a record year with revenues up 65%, 40%
higher than the prior record year of 2001. Results in our equity and invest-
ment banking businesses were relatively unchanged from the prior year,
with revenues up 2% and down 4%, respectively.
The Individual Investor Group also had significantly better financial
results in 2003. While revenues were relatively flat (down 2%), profits
before tax were up 317%. Over the last three years, we have reorganized
and improved every aspect of the business, including how we train our
advisors, define our customer segments, report our financial results and
reward our financial advisors. We believe we have set the foundation for
growth in a business that has significant secular growth opportunities given
the demographics in our country.
The performance in Discover? and Investment Management was not up
to our expectations in 2003. Starting with Discover, we have emphasized for
the last several years our key priority: improving credit quality. While there
were more positive signs toward the end of the year, Discover’s charge-offs
were up from 6.19% on a managed basis in 2002 to 6.60% in 2003. A
strong focus on costs mitigated much of this increase, resulting in a decline
in revenues and profits before taxes of 7% from 2002’s record levels.
With competitors pursuing growth at what we believe to be sub-par
economic returns, our average outstanding managed balances grew by
only 2% this year. While we believe an improved economic outlook and
significant changes in credit risk management will contribute to lower
losses in the coming quarters, the competitive environment is much more
4“Institutional clients’ needs are becoming broader and more complex. In direct response, we’ve emphasized advice and solutions and focused on differentiating Morgan Stanley in terms of our people and intellectual content. The result has been growing momentum —our relationships are stronger; our market share is showing it; and if recovery is ripe, we ought to be a beneficiary.”
Vikram Pandit
President & Chief Operating Officer,
Institutional Securities Equity Trading Market Share — North America
(In Percent)
12
9
630 6.4%19947.4%19957.2%19967.7%19978.8%19989.1%19999.3%200011.1%200110.8%
200210.4%2003
Source: McLagan
Global Investment Grade Debt Market Share (%) and Rank (#)
(Calendar Year)
86420
RANK: 4RANK: 4RANK: 4RANK: 4
RANK: 4
7.0%7.2%7.0%8.1%7.5%
20032002200120001999
Source: Thomson Financial Global Announced M&A Market Share (%) and Rank (#)
(Calendar Year)
36271890
RANK: 2
RANK: 3
RANK: 2RANK: 2RANK: 3
20.2%18.1%30.3%
34.2%34.6%
2003
2002200120001999Source: Thomson Financial Institutional Securities (Dollars in Millions)
2002 2003 % CHANGE REVENUES
19,885 23,157 16%EXPENSES (INCLUDING INTEREST) 17,248
19,549 13%PROFIT BEFORE TAXES* 2,637
3,608 37%PROFIT BEFORE TAXES MARGIN
13% 16% N/A * I ncome before losses from unconsolidated investees, income taxes and dividends on preferred securities subject to mandatory redemption
Global Equity Underwriting Market Share (%) and Rank (#)
(Calendar Year)
136.50
RANK: 3RANK: 4
RANK: 4RANK: 3
RANK: 2
10.0%8.0%10.3%10.6%12.6%2003
2002200120001999
Source: Thomson Financial
“Our work with Morgan Stanley over the course of a decade rests on the quality of our personal relationships. You need a strong investment bank in the background, but you also need people you trust to give you candid advice and deliver the full strength of the firm.”
Chad Gifford
Chairman & Chief Executive Officer, FleetBoston Financial
a long-term advisor
Morgan Stanley’s relationship with FleetBoston dates back to 1995, when we advised Shawmut and Baybanks on their respective mergers with Fleet Financial and Bank of Boston; in 1999, we advised BankBoston
on its merger with Fleet Financial to create FleetBoston Financial. In 2003, Morgan Stanley acted as sole financial advisor to FleetBoston in its merger with Bank of America. This $47 billion transaction — by far the largest bank deal of the year — created a financial services giant with some 33 million consumer relationships coast to coast.
Morgan Stanley Annual Report 2003
5difficult to forecast. As a result, we are not anticipating significant portfolio
growth throughout most of 2004.
Investment Management revenues and profits were down 8% and 22%,
respectively. Cost reductions of 2% did not offset the reduction in reve-
nues. The decline in revenues reflects the earlier decline in market values
globally as well as net outflows of customer assets, both resulting in fewer
assets under management. We were not satisfied with our market share of
new assets. In particular, investment performance in our institutional fixed
income area and negative publicity surrounding sales of affiliated funds
drove underperformance in attracting new assets. Many steps were taken
to address these issues, and we expect to improve our market share of new
assets in 2004.
Even with a more favorable economic outlook, financial strength
continues to be a key objective for the firm. In the last 12 months, we
have improved our liquidity position, lowered reliance on short-term
funding and reduced our leverage. We continue to believe financial
strength, represented in a strong balance sheet and a diversified source
of earnings, is a competitive advantage for the firm.
Looking at the months ahead, our success in capturing client wallet share
will be the key factor in driving relative financial performance. However,
given the extraordinary effort and expense associated with reducing our cost
structure, maintaining cost discipline is almost as important. As was true
in 2003, the legal and regulatory environment makes it difficult to forecast
expense levels.
I believe that as we move forward, there will be two key drivers to wealth
creation in financial services: Financial institutions with returns higher
than the cost of capital and high growth in book value will create the most
wealth for shareholders over the long term. In 2003, with a 16.5% return
on equity and 13% growth in book value per share, I believe the company
made a very significant contribution to the wealth of its owners.
6“Our satisfaction surveys show our clients place a high value on trusting relationships with their financial advisors. This year, we focused on organizing our business around specific client segments, which has allowed us to better tailor solutions to their needs. Building on trusting relationships, tailoring solutions and keeping costs down resulted in a
dramatically improved profit
picture as markets improved
and individual investors
returned in strength.”
John Schaefer
President & Chief Operating Officer,
Individual Investor Group Client Assets
(Dollars in Billions)
660
440
2200$565$516$595$654
$595
$445200320022001200019991998Headcount
(Financial Advisors and Non-sales Staff)12,5468,694200211,0867,84021,240
18,9262003
Non-sales
Financial Advisors (excludes trainees)Fee-Based Assets % of Total Assets
20
15
1050
23%
21%
19%18%
14%12%
2003
20022001200019991998
Individual Investor Group (Dollars in Millions)
2002 2003 % CHANGE REVENUES
4,264 4,167 –2%EXPENSES (INCLUDING INTEREST)
4,155 3,713 –11%PROFIT BEFORE TAXES
109 454 317%PROFIT BEFORE TAXES MARGIN 3% 11% N/A
Satisfaction Level of U.S. High Net Worth Clients of the Firm (Percent Exceptionally or Very Satisfied)5854
50
464254%200258%
2003Source: M organ Stanley Retail National Client Satisfaction Survey
Source: C ompany Filings Source: C ompany Filings
“The thing I liked most about Morgan Stanley was that they built a personal relationship. They asked me,
‘What’s your goal? What’s your life financial strategy?’ There’s nothing impersonal about what they do. That’s everything.”
Eric Lee
Individual Investor Group Client
the ClientOne commitment
In 2003, Morgan Stanley’s Individual Investor Group launched new initia-tives to enhance the client experience at Morgan Stanley and sharpen our focus on clients. One of the most significant was ClientOne. Centered on the needs of our affluent and high net worth clients, ClientOne gives Morgan Stanley financial advisors a consistent approach to understanding each client’s goals; identifying their options; recommending a strategy; and accessing all of Morgan Stanley’s resources to carry it out. ClientOne confirms our advisors’ ongoing commitment to each client.
Morgan Stanley Annual Report 2003
7market share
Our overall market share performance in our securities businesses was the
strongest ever. Our full-year results in a number of the key categories include:
? #1 in Global Equity T rading
? #2 in announced Global Mergers & Acquisitions
? #3 in Global Equity Underwriting
? #4 in Global Debt Underwriting, ahead of all peer securities competitors
? Flat revenue market share among retail securities companies even
while reducing the number of our financial advisors by 1,500 from
12,500 to 11,000
? Our internal measures of share with our largest fixed income clients
indicate positive share gains as our increased breadth of product
strengthens our value to clients, especially in credit products.
Each of the above rankings represents an improvement over last year, or
at worst, equal performance to last year. What is impressive is the breadth
of improved client acceptance of the value of our people, products and
services. I believe all of this traces back to the strategy of client focus,
which, while always strong, has now become engraved in our culture
throughout the firm.
In most businesses —and particularly in Mergers & Acquisitions —our
performance in the second half of the year was far better than the first
half. We believe our momentum with clients is building as we demonstrate
to them every day that their interests come first. As the capital markets
strengthen in 2004, we expect to continue strong market share performance
and leadership in all securities businesses.
In Investment Management, we had disappointing market share results
in 2003. Our overall share of assets under management declined from
3.0% to 2.7% as a result of:
? Net outflows of institutional fixed income assets as clients shifted to
equities at a time our investment performance was uncharacteristically
underperforming against our benchmarks.
8“Our focus is on putting clients first and on creating quality products. The separately managed account business is growing; we’re committed to long-term, top-quartile performance in major invest-ment disciplines over the next few years.” Mitchell Merin President & Chief Operating Officer, Investment Management
Assets under Management Mutual Fund Market Share*
32
10
2.7%
3.0%
3.3%
2003
20022001Investment Management
(Dollars in Millions)
2002 2003 % CHANGE REVENUES
2,722 2,514 –8%EXPENSES (INCLUDING INTEREST)
2,055 2,023 –2%PROFIT BEFORE TAXES
667 491 –26%PROFIT BEFORE TAXES MARGIN 25% 20% N/A
Source: Strategic Insight
* I ncludes long-term open-end mutual funds
Lipper Percent of Assets in Top Half
(Total Assets Including Money Markets*)
75
50250
57%62%
56%64%71%75%
75%70%1 Year
3 Year 5 Year 10 Year
Nov 2003Nov 2002
Sources: Lipper, Performance Link * R eflects recent change in Lipper methodology
“Morgan Stanley was among our very first strategic partnerships, starting almost a decade ago.
In the investment world,
it’s a miracle to have a relationship that lasts that long. It takes a massive amount of trust — not just
in their capability but also
in their integrity. The result has been not only excellent investment performance but also a vast amount of proprietary research that has increased both of our firms’ competitive advantage.”
Britt Harris
President,
Verizon Investment Management Corp.
partnership that works
Morgan Stanley’s 10-year strategic partnership with Verizon Investment Management represents both organ-izations’ commitment to working together to achieve superior results over the long term. Morgan Stanley manages more than $2.5 billion for Verizon’s pension fund, 401(k) and defined contribution plan in a global investment portfolio that spans a wide range of asset classes. The portfolio has achieved superior returns on both a risk-adjusted and an absolute basis, benefiting from the deep relationship and enthusiastic support of both sides.