In 3Q2008, Morgan Stanley reported net revenues increased 1% y-o-y to $8,049 mn over $7,958 mn in 3Q2007. However reported net revenues included a pre-tax gain of $745 mn relating to follow-on offering of MSCI in 3Q2008. Excluding the impact of above pre-tax gains, adjusted net revenues declined 8% to $7,304 mn in 3Q2008. In 3Q2008 institutional securities revenues included $1.5 bn of revenue from widening of credit spreads on firm issued structured notes. Excluding the impact of widening credit spread on firm's debt, Morgan Stanley's revenues declined 27% to $5,804 mn in 3Q2008. Morgan Stanley's institutional securities adjusted revenues (excluding the impact of pre-tax gain and widening credit spread on firm's own debt) declined 26.4% to $3,666 mn. Global wealth management group and asset management segment revenues declined 8% and 53%, respectively to $1,555 mn and $647 mn, respectively in 3Q2008 from $1,683 mn and $1,364 mn, respectively in 3Q2007. Morgan Stanley's compensation expenses increased 3% to $3,695 mn in 3Q2008 with compensation expenses-to-net revenues of 46% in 3Q2008 versus 45% last year. Non-compensation increased 15% to $2,406 mn against $2,097 mn in 3Q2007 primarily of higher occupancy cost and $288 mn charge related to the auction rate securities settlement. As a result of higher non-compensation expenses, non-compensation expenses to net revenues increased to 30% in 3Q2008 over 26% in 3Q2007. Net income from continuing operations including pre-tax gain and impact of widening of credit spreads on Morgan Stanley's own debt recorded in 3Q2008, declined 3% to $1,425 mn versus $1,474 mn in 3Q2007. Overall reported net income available to common shareholders' declined 7% to $1,414 mn (or $1.32 per share) in 3Q2008 compared with $1,526 mn (or $1.44 per share) in 3Q2007.
As a result of slowdown in capital markets activity, Morgan Stanley's announced M&A transactions declined 63% y-t-d to $390 bn while Morgan Stanley's global IPO and debt volumes declined 66% and 46%, respectively to $4.9 bn and $148 bn, respectively. However in an endeavor to de-lever its balance sheet, Morgan Stanley reduced its balance sheet size with total assets declining 4.1% q-o-q and 16.6% y-o-y. Resultantly Morgan Stanley's leverage declined to 23.5x in August 2008 compared with 25.1x in May 2008 and 32.3x in August 2007. However despite deleveraging, Morgan Stanley's level 3 assets-to-total assets increased from 6.7% as of May 2008 to 8.0% as of August 2008. As of August 2008, Morgan Stanley's exposure towards U.S. subprime mortgage stood at a staggering 44.3% of its shareholder's equity.
See The Riskiest Bank on the Street and Reggie Middleton on the Street's Riskiest Bank - Update for a broader analytical take.