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08 May 2006
MOODY'S CHANGES MORGAN STANLEY'S OUTLOOK TO STABLE FROM NEGATIVE
Approximately $110 Billion of Debt Affected
New York, May 08, 2006 -- Moody's changed the outlooks on the ratings of Morgan Stanley (senior
unsecured at Aa3) and its subsidiaries to stable from negative.
The stable outlook on the ratings of Discover Bank (C-/A3) was
During 2005, Morgan Stanley (MS) endured a messy battle over succession
and strategy of the firm. This resulted in the selection of a new
CEO and almost wholesale turnover of the board of directors and senior
management. This turmoil produced only negligible damage to Morgan
Stanley's outstanding institutional securities franchise, which
is the key profit generator for the firm, and underpins the ratings,
"Morgan Stanley still holds enviable positions in high-margin
investment banking and prime brokerage, and has a well-balanced
and profitable trading business," said Moody's Senior
Vice President Peter Nerby. "The institutional business showed
solid revenue and profit momentum in the first quarter of 2006."
MS also has a consistent track record of successful risk management,
although trading results have increased in volatility since 2003.
Management also intends to pursue less liquid and riskier activities (such
as principal investing, power plants and emerging markets).
Moody's expects that Morgan Stanley will maintain a strong liquidity
profile notwithstanding the growth in less-liquid positions over
the next two to three years.
Moody's noted that MS' corporate governance has stabilized
to a large extent. Managing director turnover also has trended
back to historic norms. However, governance remains in transition,
as new board members and new management build working relationships.
Moody's will continue to monitor governance developments within
MS, but, at this time, governance is considered neutral
to the ratings.
"A central challenge for the firm and the board will be to forge
a more cohesive and meritocratic "one-firm" culture,
many years after the merger of Morgan Stanley and Dean Witter,"
said Moody's Nerby.
Moody's said that MS' profitable asset management business
also adds a reliable stream of less capital-intensive earnings,
but noted that MS' retail brokerage segment (Global Wealth Management)
lags best-in-class peers in terms of scale, profitability
and advisor productivity. The rating agency noted that the recent
$2.5 billion sale of the aircraft portfolio is positive
for bondholders as is the objective of the firm to achieve $600
million in cost savings by 2008.
Moody's also affirmed Discover Bank's ratings, noting
that Discover Card provides for MS some diversification benefits and an
uncorrelated earnings stream that can offset periodic litigation charges
and improves overall earnings stability. Nonetheless, Discover
has lost market share recently due to consolidation amongst major card
issuers and continued innovation in card and reward products for consumers.
Increasing consumer acceptance, growing share and strengthening
returns on receivables will remain a challenge for Discover in Moody's
opinion. MS management has decided to retain Discover, but
retaining or divesting Discover is neutral for MS ratings at this point.
In discussing what could affect the ratings in the future, Moody's
said that the capital intensity of the securities industry is rising.
This results from greater litigation risks, more principal risk-taking
and ongoing margin compression in liquid products. This means that
it is unlikely that ratings for Morgan Stanley could move up in the future.
Alternatively, a decrease in Morgan Stanley's liquidity or
an increase in its earnings volatility, possibly as a result of
increased position taking in less liquid instruments, could lead
to downward pressure on the firm's ratings.
The entitities that had their outlooks changed to stable from negative
Morgan Stanley -- senior unsecured debt Aa3; subordinate
debt A1; preferred shares (P)A2.
Morgan Stanley Bank -- long-term issuer rating Aa3,
long-term bank deposit Aa3, bank financial strength rating
Bank Morgan Stanley AG -- long-term bank deposit
Aa3, bank financial strength rating of C+
Various Morgan Stanley Capital Trusts -- trust preferred
securities of A1.
The following are the primary ratings of Discover Bank that were affirmed:
Discover Bank -- long term bank deposit rating of A3;
bank financial strength rating of C-; short-term bank
deposit rating of Prime-2.
Morgan Stanley is a New York based financial institution that reported
$2.5 billion of pretax profit in the first quarter of 2006.
Peter E. Nerby
Senior Vice President
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service
No Related Data.
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