Morgan Stanley 2009 Annual Report Download - page 45

interest rate by 1.50% to a record low of 1.00%, and during the second half of 2009, the ECB left its benchmark
interest rate unchanged. During the first half of 2009, the Bank of England (“BOE”) lowered its benchmark
interest rate by 1.50% to 0.50%, and during the second half of 2009, the BOE left its benchmark interest rate
unchanged. During 2009, the BOE pursued a quantitative easing policy in which the BOE purchased securities,
including U.K. Government Gilts, with the objective of increasing the money supply.
In Asia, economic conditions continued to be challenged by adverse economic developments that began in the
Fall of 2008, including a decline in exports in both China and Japan. Despite lower exports, China’s economy
continued to benefit from government spending for capital projects. Equity markets in both China and Japan
ended 2009 higher, as compared with the beginning of the year. The Bank of Japan (“BOJ”) pursued a
quantitative easing policy in which the BOJ would purchase securities with the objective of increasing liquidity
and reducing the reliance on short-term liquidity by providing longer term liquidity via Japanese government
bond purchases.
Overview of 2009 Financial Results Compared with Fiscal 2008.
The Company recorded net income applicable to Morgan Stanley of $1,346 million in 2009, a 21% decrease
from $1,707 million in fiscal 2008. Comparisons of the 2009 results with fiscal 2008 were impacted by seven
months’ results of MSSB, which closed on May 31, 2009.
Net revenues (total revenues less interest expense) increased 6% to $23,358 million in 2009. Net revenues included
losses of approximately $5,510 million in 2009 related to the tightening of the Company’s credit spreads on certain
long-term and short-term borrowings accounted for at fair value compared with gains of $5,594 million in fiscal
2008 related to the widening of the Company’s credit spreads on such borrowings. Net interest revenues were $990
million in 2009 as compared with $3,367 million in fiscal 2008. The decrease in 2009 was primarily due to a lower
interest rate environment coupled with a lower average mix of interest-earning assets and interest-bearing liabilities,
including lower client balances in the Company’s prime brokerage business. Net revenues in 2009 also included a
gain of $319 million related to the sale of undivided participating interests in a portion of the Company’s claims
against a derivative counterparty that filed for bankruptcy protection. Non-interest expenses increased 7% to
$22,501 million in 2009, primarily due to higher compensation costs, partly offset by lower non-compensation
costs. Compensation and benefits expense increased 21%, primarily reflecting the consolidation of MSSB.
Non-compensation expenses decreased 11%, primarily due to the Company’s initiatives to reduce costs, lower
levels of business activity and non-cash charges of $725 million related to the impairment of goodwill and
intangible assets in fiscal 2008, partially offset by additional operating costs and integration costs related to MSSB.
Results included in discontinued operations for 2009 reflected the pre-tax net gain of $625 million related to the sale
of the Company’s remaining ownership interest in MSCI and the disposition of Crescent (see Note 23 to the
consolidated financial statements). Diluted EPS were $(0.77) in 2009 compared with $1.39 in fiscal 2008. Diluted
EPS from continuing operations were $(0.93) in 2009 compared with $0.88 in fiscal 2008. Due to the Company’s
repurchase of its Series D Fixed Rate Cumulative Perpetual Preferred Stock (“Series D Preferred Stock”), the
Company incurred a negative adjustment of $850 million in its calculation of basic and diluted EPS (reduction to
earnings (losses) applicable to the Company’s common shareholders) for 2009 due to the accelerated amortization
of the issuance discount on the Series D Preferred Stock.
The Company’s effective income tax rate from continuing operations was a benefit of 39% in 2009. The
Company recognized a tax benefit of $331 million in 2009, resulting from the cost of anticipated repatriation of
non-U.S. earnings at lower than previously estimated tax rates. Excluding this benefit, the annual effective tax
rate in 2009 would have been a benefit of 1%. The annual effective tax rate in 2009 is reflective of
the geographic mix of earnings and includes tax benefits associated with the anticipated use of domestic tax
credits and the utilization of state net operating losses.
The results for fiscal 2008 included a pre-tax gain of $687 million related to the sale of MSWM S.V., the Spanish
onshore mass affluent wealth management business (see Note 17 to the consolidated financial statements).
41