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Salomon Smith Barney Financial Services Conference

Salomon Smith Barney Financial Services Conference. Philip J. Purcell, Chairman & CEO Stephen S. Crawford, CFO January 29, 2003. Discover – 2002 Challenges. Total Industry Mail Volume (Bn). Discover New Accounts (MM). Average Industry Loss Rates. Discover Loss Rates.

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Salomon Smith Barney Financial Services Conference

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  1. Salomon Smith Barney FinancialServices Conference Philip J. Purcell, Chairman & CEO Stephen S. Crawford, CFO January 29, 2003

  2. Discover – 2002 Challenges Total Industry Mail Volume (Bn) Discover New Accounts (MM) Average Industry Loss Rates Discover Loss Rates Sources: Comperemedia, Carddata, Morgan Stanley earnings releases

  3. Credit Services Financial Performance Ending Loans ($Bn) Interest Spread Profit Before Tax ($MM) Delinquencies (30+ day) Source: Morgan Stanley 4Q02 Earnings Financial Supplement

  4. Discover Market Share Industry Receivables Industry Network Volume (%) (%) (1) (1) Note: (1) Through Calendar 2Q2002, the most recent industry data available Source: The Nilson Report

  5. Credit Services 2003 Initiatives • Maintain Focus on Portfolio Credit Quality • Maintain U.S. Market Share • Improve Network Coverage and Economics

  6. MoneyMarket FixedIncome Equity Other(1) Investment Management – 2002 Challenges S&P500 Average MWD Asset Mix Industry Equity Fund Flows ($Bn) Note: (1) Includes alternative investments Sources: Factset, Strategic Insight, Morgan Stanley 4Q02 Earnings Financial Supplement

  7. Investment Management Financial Performance Revenues ($MM) Expenses ($MM) Profit Before Tax ($MM) Source: Morgan Stanley 4Q02 Earnings Financial Supplement

  8. Nov-01 Nov-02 Consistent Performance Lipper % of Assets in Top Half (%) Source: Lipper

  9. Fund Complex # of 4/5 Stars(1) Rank Fidelity Group Vanguard Group J.P. Morgan Chase Morgan Stanley Franklin Templeton Funds T. Rowe Price Allianz Mellon Deutsche Asset Management Citigroup 112 58 52 49 48 47 37 35 35 29 1 2 3 4 5 6 7 8 8 10 Highly Ranked Funds Source: Morningstar Principia Note: (1) Morningstar star ratings are as of November 2002. Funds are classified based on the highest-rated share class.

  10. 2001 2002 Investment Management Market Share Assets Under Management (1) (%) Source: Strategic Insight, Simfund Note: (1) Strategic Insight classifies assets and net flows attributable to MSIA D shares in the institutional channel. Affiliated Retail assets include long-term and short-term funds. Non-Affiliated Retail and Institutional assets include long-term funds.

  11. Investment Management 2003 Initiatives • Increase market share • Achieve superior investment performance • Maintain profit margins • Build on relationship with IIG financial advisors

  12. Individual Investor Group – 2002 Challenges Industry Equity Fund Flows ($Bn) Industry Margin Debits ($Bn) NASDAQ Index Level NASDAQ Trading $ Volume ($Bn) Sources: Strategic Insights, NASDAQ, NYSE

  13. Individual Investor Group Financial Performance Revenues ($MM) Expenses ($MM) Profit Before Tax ($MM) Source: Morgan Stanley 4Q02 Earnings Financial Supplement

  14. Individual Investor Group Market Share Share of Industry Client Assets (1) (%) (2) Notes: (1) Industry universe includes Morgan Stanley, Merrill Lynch. Salomon Smith Barney, UBS PaineWebber, Schwab and Prudential. Morgan Stanley is reported total IIG client assets and includes IAS, PWM-HNW and Affluent. MER is global client assets and excludes MLIM direct sales; Smith Barney is total client assets; SCH is total client assets; UBS PW is invested assets; Prudential is Financial Advisory segment client assets. (2) All 2002 client asset figures (Morgan Stanley and competitors) are from 3Q02 earnings reports. Sources: Company filings

  15. Individual Investor Group 2003 Initiatives • Increase total and fee-based client assets • Grow market share of revenue and client assets • Maintain expense discipline • Increase broker productivity

  16. S&P 500 Dow Nasdaq Volume ($Bn) NYSE Volume ($Bn) Global Equity Volume ($Bn) Global IPO Volume ($Bn) Investment Grade Volume ($Bn) M&A Completed ($Bn)(1) M&A Announced ($Bn)(1) 1,139.45 9,851.56 11,633 10,623 435 87 2,456 2,285 1,595 Institutional Securities – 2002 Challenges 2001 2002 % Change 936.31 8,896.09 7,524 10,412 362 77 1,843 1,206 1,052 (18%) (10%) (35%) (2%) (17%) (11%) (25%) (47%) (34%) Note: (1) Completed and Announced M&A data is for deals of $100MM or more Sources: Index levels and volumes: Factset. Underwriting and M&A volume: Thomson Financial Securities Data

  17. Institutional Securities Financial Performance Revenues ($MM) Expenses ($MM) Profit Before Tax ($MM) Source: Morgan Stanley 4Q02 Earnings Financial Supplement

  18. Risk Management • Value at risk • Exposure to illiquid assets • Lending

  19. Completed M&A Announced M&A Global Equity Offerings Investment Grade Debt Offerings Institutional Securities Market Share 2001 Rank 2002 Rank 2 2 4 4 2 4 5 4 Source: Thomson Financial Securities Data

  20. Institutional Securities: Building Market Share • Over 3,000 client satisfaction surveys • Restructured to be more client friendly • Firm relationship model • Global capital markets group • Sectorization • Better client data • Targeting • Accountability • Cost structure / investment in technology • Reputation / brand

  21. Institutional Securities 2003 Initiatives • Improve market share across businesses • Continue investment in technology • Balance secular and cyclical trends

  22. Ansett Worldwide • $4.8Bn portfolio as of November 30, 2002 • $161MM in impairment charges ($87MM 4Q’01 and $74MM 3Q’02) • $30MM in repossession charges (4Q’01) • Approximately $20MM per quarter drag on operating earnings • 30 planes have come off lease last 12 months; 25 re-leased • 34 planes due to come off lease over next 12 months • Diverse exposure • Ongoing deferral of economic recovery • Supply/demand imbalance Source: MWD quarterly earnings releases, SEC filings and earnings conference calls

  23. Revenues 2002 Revenues as % of 2001 Revenues Retail and Inv Mgmt (2) Underwriting Trading (1) M&A MWD GS LEH MER 68% 72% 72% 64% 76% 75% 98% 71% 80% 88% 90% NA 90% 87% Notes: (1) Combined Equity and Fixed Income Trading. Includes principal trading, commissions and net interest revenue. (2) Retail combines IIG and Investment Management for Morgan Stanley, and Merrill Lynch Investment Managers (MLIM) and Global Private Client for Merrill Lynch Source: Company 4Q02 earnings releases

  24. 2002 Comp as % of 2001 Comp 2002 Non-Comp as % of 2001 Non-Comp 85% 84% 91% 86% 89% 80% 107% 94% Cost Discipline MWD MER LEH GS Note: Excludes restructuring charges and 9/11-related costs Source: Company 4Q02 earnings releases

  25. MWD LEH GS MER 25% 24% 23% 21% Pre-Tax Profit Margins – 2002 Source: Company filings

  26. MWD MER LEH GS 14.1% 12.0% 11.9% 11.3% Return on Equity – 2002 Source: Company filings

  27. Relative Returns Annual ROE Comparison (Indexed to MWD) MWD MER LEH GS Source: Company filings and Morgan Stanley Research

  28. Firmwide 2002 Accomplishments • Intact and enhanced reputation relative to competitors • Established brand for both Discover and Morgan Stanley • Highest profitability among major competitors • Continued strong balance sheet ratios and debt ratings • No high-priced acquisitions from 1999 and 2000 • Restructured costs and improved profit economics firmwide

  29. Firmwide 2003 Initiatives • Superior financial performance • Improve market share across all major businesses • Positively differentiate the Firm’s reputation and brand • Ensure Firm is well-positioned for industry consolidation • Manage talent

  30. Salomon Smith Barney FinancialServices Conference Philip J. Purcell, Chairman & CEO Stephen S. Crawford, CFO January 29, 2003

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