Morgan Stanley sees increased appetite for risk as clients return, but most investors still want safer bets

By Jennifer Lanning Drey

Portland, Ore., June 18 - Morgan Stanley is beginning to see increased interest in risk-taking among its clients related to leveraged loans and financial bonds, as the firm's client activity shifts toward normalized levels following a subdued second quarter, Colm Kelleher, chief financial officer of Morgan Stanley, said Wednesday during the firm's second-quarter earnings conference call.

"Clearly the markets are still nervous and while there are encouraging signs of a trend, many issues remain - rising inflation, higher energy prices, rising unemployment and the ongoing housing downturn will continue to pressure the U.S. consumer," Kelleher cautioned.

The majority of Morgan Stanley clients continue to lean toward safer investments, while the firm's emerging market pipeline remains robust, he said.

The soft client activity seen in most of the second quarter had a negative impact on revenues within the firm's institutional securities business, which posted net revenues of $3.6 billion for the quarter ended May 31, down from net revenues of $7.4 billion in the prior-year second quarter.

Within the segment, investment banking revenues dropped by 49% from last year's second quarter as underwriting revenues fell due to higher equity underwriting revenues being offset by lower revenues in fixed income underwriting.

Fixed income underwriting revenues decreased by 57% from last year's second quarter, reflecting lower revenues from loans and securitized products, which offset strong results in investment-grade bond issuance, Kelleher said.

Fixed income sales and trading net revenues were 85% below the second quarter of 2007, driven by lower net revenues in the interest rate, credit and currency segment, net losses in mortgage proprietary trading and a decline in commodities.

Kelleher said Morgan Stanley's investment banking pipeline remains healthy with high levels of strategic dialogue occurring between the firm and corporate issuers.

The CFO also reported that during the second quarter, Morgan Stanley dropped its leverage acquisition portfolio to $12.7 billion from a peak of $35 billion.

"Some liquidity did return here to the marketplace this quarter," Kelleher said.

Morgan Stanley reported second-quarter income from continuing operations of $1.03 billion, compared with $2.36 billion in the second quarter of 2007.

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