Morgan Stanley 2004 Annual Report Download - page 6

Discover฀ now฀ has฀ a฀unique฀ value฀proposition฀for฀
issuers,฀one฀that฀we฀have฀already฀begun฀to฀exploit.฀
A฀more฀vibrant฀network฀offers฀further฀opportunities฀
to฀strengthen฀our฀Discover฀Card฀business,฀as฀shown฀
by฀ the฀ recent฀ announcement฀ that฀ GE฀ Consumer฀
Finance฀will฀issue฀a฀new฀card฀to฀Wal-Mart฀customers฀
on฀the฀Discover฀Network.
Over฀the฀past฀five฀years,฀Discover฀has฀had฀the฀best฀profit฀
growth฀of฀any฀of฀our฀reporting฀businesses.฀Discover’s฀
financial฀returns,฀measured฀in฀both฀aggregate฀earnings฀
and฀return฀on฀capital,฀have฀been฀extremely฀important฀
to฀the฀firm’s฀overall฀results.
Demographic,฀regulatory฀and฀business฀changes฀will฀
continue฀to฀generate฀more฀wealth฀for฀—฀and฀place฀
added฀ responsibility฀ on฀—฀individuals฀ to฀ manage฀
across฀ an฀ increasingly฀ complex฀ array฀ of฀ financial฀
products.฀Offering฀distinctive฀products฀through฀a฀
trusted฀intermediary฀is฀critical฀for฀any฀financial฀firm฀
that฀hopes฀to฀have฀a฀meaningful฀presence฀in฀a฀market฀
expected฀to฀grow฀at฀least฀twice฀the฀rate฀of฀the฀GDP.฀
Morgan฀Stanley฀is฀very฀fortunate฀to฀be฀one฀of฀a฀small฀
number฀of฀firms฀with฀both฀excellent฀“manufacturing”฀
and฀“distribution”฀capabilities.
Our฀Investment฀Management฀business฀has฀focused฀
successfully฀on฀providing฀high-performance฀products฀
to฀help฀meet฀the฀wealth฀management฀and฀long-term฀
investment฀needs฀of฀our฀clients.฀We฀have฀thought฀
hard฀and฀made฀extensive฀realignments฀in฀this฀busi-
ness฀over฀the฀past฀three฀years.฀In฀2004,฀Investment฀
Management฀increased฀profits฀by฀72%,฀posted฀strong฀
investment฀returns฀for฀clients฀and฀was฀our฀highest฀
ROE฀business.฀We฀believe฀our฀established฀brand฀and฀
global฀presence฀provide฀a฀significant฀opportunity฀for฀
expansion฀both฀inside฀and฀outside฀the฀U.S.
Global฀capital฀markets฀have฀been฀the฀growth฀engine฀
for฀financial฀services฀for฀the฀past฀20฀years.฀Short฀of฀
an฀unlikely฀reversal฀in฀globalization,฀I฀believe฀finan-
cial฀markets฀will฀continue฀to฀take฀share฀from฀banks฀
and฀governments฀in฀providing฀and฀allocating฀capital.฀
As฀noted฀earlier,฀our฀leadership฀position฀in฀capital฀
markets฀is฀even฀stronger฀today฀as฀a฀result฀of฀client฀
initiatives฀we฀put฀in฀place฀in฀2000.
In฀addition฀to฀a฀major฀presence฀in฀these฀larger฀market฀
businesses,฀the฀firm฀is฀also฀a฀leader฀in฀pursuing฀many฀
of฀ the฀ most฀ attractive฀ industry฀ growth฀ segments.฀
Commodities,฀prime฀brokerage,฀securitization฀and฀
China฀ exemplify฀ leading฀ market฀ positions฀ with฀
significant฀growth฀opportunities.
We฀believe฀the฀trends฀for฀2005฀are฀in฀our฀favor฀as฀
well.฀As฀our฀revenues฀are฀more฀driven฀by฀the฀health฀
of฀the฀equity฀markets฀than฀some฀of฀our฀competitors’,฀
we฀delivered฀premium฀returns฀on฀equity฀in฀the฀years฀
1997-2002.฀In฀2003-2004,฀however,฀with฀fixed฀income฀
markets฀driving฀revenues,฀our฀ROE฀performance฀vis-
à-vis฀our฀competition฀was฀at฀the฀median.฀We฀began฀to฀
see฀this฀balance฀shift฀back฀again฀in฀2004,฀and฀we฀view฀
this฀as฀a฀competitive฀advantage฀moving฀forward.
To฀take฀advantage฀of฀these฀trends,฀we฀need฀to฀address฀
several฀factors฀that฀hurt฀our฀performance฀in฀2004.฀
First,฀profitability฀in฀our฀Individual฀Investor฀Group฀
did฀not฀meet฀expectations฀due,฀in฀part,฀to฀the฀regu-
latory฀and฀settlement฀costs฀that฀we฀incurred฀—฀costs฀
that฀ reduced฀ earnings฀ by฀ over฀ $120฀million.฀ A฀
change฀in฀accounting฀in฀our฀fourth฀quarter฀reduced฀
profitability฀by฀$80฀million฀more.฀That฀$200฀million฀
reduced฀Individual฀Investor฀Group’s฀profit฀margin฀
by฀four฀percentage฀points.฀We฀now฀have฀in฀place฀a฀
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