AccessMyLibrary provides FREE access to millions of articles from top publications available through your library.
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to the Morgan Stanley conference call. The following is a live broadcast by Morgan Stanley, and is provided as a courtesy. Please note that this call is being broadcast on the Internet through the Company's Website, at www.MorganStanley.com. A replay of the call and webcast will be available through the Company's Website, and by phone until January 20, 2006.
This presentation may contain forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management's current estimates, projections, expectations or beliefs, and which are subject to risks and uncertainties that may cause actual results to differ materially.
For a discussion of additional risks and uncertainties that may affect the future results of the Company, please see forward-looking statements immediately preceding Part 1, Item 1, Competition and Regulation, and Part 1, Item 1, and certain factors affecting results of operations, in Part 2, Item 7 of the Company's Annual Report on Form 10(K), for the Fiscal Year ended November 30, 2004, and management's discussion and analysis of financial conditions and results of operations, in the Company's Quarterly Reports on Form 10(Q), for the quarterly period ended February 28, 2005, May 31, 2005, and August 31, 2005, and in other items throughout the Form 10(K) and Forms 10(Q).
The information provided today may also include certain nonGAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included in our Annual Report on Form 10(K), our Quarterly Reports on Form 10(Q), and our current reports on 8(K), which are available on our Website, www.MorganStanley.com. Any recording, rebroadcast or other use of this presentation in whole or in part is strictly prohibited without prior written consent of Morgan Stanley. This presentation is copyrighted and proprietary to Morgan Stanley.
At this time, I would like to turn the program over to your moderator for today's call, Mr. David Sidwell.
DAVID SIDWELL, EVP, CFO, MORGAN STANLEY: Thanks very much operator, and thanks to everyone for joining us today, the strike aside. As you have seen from our press release, Morgan Stanley had a great quarter. This was accomplished despite everything the firm has been through.
Even with this financial performance, we recognize that we have a lot of work ahead of us to execute our strategic plans. We are committed to reporting progress against our specific goals through increased disclosure. This quarter we've added net income, capital, and ROE by business, a breakout of principal investing assets and the related income, cash deposits for retail brokerage, and a compensation table to illustrate the timing of equity compensation amortization over the next several years. Now to the results.
As you know, the Capital Markets were unusually strong in the fourth quarter, and we delivered results particularly in our Institutional Securities businesses, that were at or near record levels. This represents a significant shift from our typical seasonal trend of lower results in the final two quarters of the year. Pages 1 and 2 of the supplement provide firm-wide results. Fourth quarter net income was 1.8 billion, versus 144 million in the third quarter. The third quarter included the write-down of our aircraft leasing business, and expenses related to senior management severance and new hires. Excluding these items, on an operating basis third quarter earnings were 1.17 billion.
EPS in the fourth quarter were $1.68, with $1.64 from continuing operations. This includes an income tax benefit associated with repatriating foreign earnings on to the American Jobs Creation Act, at a substantially reduced tax rate. The benefit was 280 million, or $0.26 per share. Excluding this item, income from continuing operations per share was $1.38, compared with $1.09 in the third quarter. ROE was 25% from continuing operations, and 21% excluding the tax benefit. By all measures a very strong fourth quarter.
For the full year, net income was 4.3 billion, down 5%. EPS was $3.95, and ROE 15%. Income from continuing operations was 5.2 billion. EPS, $4.81; and ROE, 19%. Net revenues for the quarter was 7 billion, essentially flat with the third quarter. For the full year, net revenues were a record of 26.8 billion, up 13% from fiscal '04, and noninterest expenses were 19.4 billion, up 15%.
Total noninterest expenses for the quarter were 4.8 billion, down 7%. The largest component, compensation and benefits expense, was 2.7 billion, down from 3.2 billion in the third quarter; for a compensation to net revenue ratio of 38.4%, down from 45.6% in the third quarter. This is lower than we had forecast for two reasons. First, the firm's decision outlined in last week's press release to increase the equity portion of compensation to the management committee and certain members of our senior management team, and, second, fourth quarter revenues were significantly higher than we had anticipated.
For the full year, compensation expense was 11.3 billion, up 15% from 2004; representing a 42.2% comp ratio, versus 41.6% last year. 2005 compensation expense includes 311 million in compensation related to senior management severance and new hires. Excluding this, the full year ratio was 41.1%.
Noncompensation expense in the fourth quarter was 2.2 billion, including 90 million in legal and regulatory expenses, primarily related to IPO allocation matters. For the full year, noncompensation expenses of 8.1 billion included the Coleman and Parmalat legal charges of 535 million. For the year, total legal and regulatory matters expense was about 750 million. The World Trade Center insurance settlement gave us a benefit of 251 million in the year.
In the fourth quarter, our fiscal 2005 tax rate for continuing operations was finalized at 26.5%, versus last year's 28.8%. The fourth quarter tax rate was 15.4%, which compares with the 28.8% tax rate from continuing operations in the third quarter. Excluding the income tax benefit from the American Jobs Creation Act, the quarterly tax rate would have been 29%. The annual rate would have been 30.5%. We estimate that the 2006 rate will be slightly higher than this rate.
Now let me move on to the business segment. Turning to Institutional Securities, which is detailed on page 5 of the supplement, we are very pleased with our results for the quarter. Net revenues of 4.2 billion were our best fourth quarter ever, and our second best quarter overall, slightly below our record third quarter. PBT of 1.6 billion was up 22%, and PBT margin rose to 38%, from 31% in the third quarter.
Noninterest expenses of 2.6 billion were down 10%. Compensation was down due to the increased equity component awarded to senior managers in this division. Noncompensation expenses were up slightly, due to legal and regulatory matters expenses, as we adjusted upwards the legal reserve for IPO allocation matters I just referred to. For the year, net revenues were a record 15.7 billion, up 20%. PBT of 4.8 billion was up 11%. Our return on equity for this business in fiscal '05 was 24%.
Looking at page 6 of the supplement, investment banking revenues were 1.1 billion in the fourth quarter, up 23% from the third quarter. The advisory revenues increased 23% to 479 million. Equity underwriting revenues were up 79% to 358 million. And fixed income underwriting revenues were down 15%, to 265 …