Investment bank Morgan Stanley today reported lower net income for its third quarter, as its results were stung by the impact of the credit crunch.

The firm said that income from continuing operations for the third quarter ended Aug. 31 came in at US$1.5 billion, a decrease of 7% from the third quarter of 2006. Net revenues were US$8 billion, up 13% from last year’s third quarter. However, non-interest expenses increased 18% from last year. The annualized return on average common equity from continuing operations was just 17.2% in the current quarter compared with 23.3% in the same quarter a year earlier.

The results for Discover Financial Services, prior to its spin-off on June 30, are reported in discontinued operations on an after-tax basis. Including the results, net income for the quarter was down 17% from the third quarter of 2006.

For the first nine months of 2007, net income was a record US$6.8 billion, a 29% increase from US$5.3 billion a year ago. Income from continuing operations was a record US$6.2 billion, up 41% from last year.

The firm said that fixed-income sales and trading net revenues decreased 3% from last year, as significantly lower revenues in credit products were offset by record revenues in interest rate and currency products. The firm also saw sales and trading losses of approximately US$940 million due to the marking to market of loans as well as closed and pipeline commitments. The losses reduced third-quarter earnings per share from continuing operations by approximately 33 cents US, it said. The markdowns reflect the illiquidity created by current market conditions.

Its other businesses held up better. Institutional Securities achieved net revenues of US$5 billion, up 2% from last year, although down from the record second quarter. Investment Banking revenues increased 45% to US$1.4 billion from the third quarter of 2006. Equity sales and trading net revenues increased 16% to US$1.8 billion from last year. Record results in derivatives and prime brokerage and record trading volumes in the core equity business were partly offset by significant trading losses in quantitative strategies, it said.

Additionally, Global Wealth Management delivered its sixth consecutive quarter of improved performance, with the third highest quarterly net revenues ever and a pre-tax margin of 17%. Asset Management recorded its fourth consecutive quarter of net positive flows for the quarter of US$20.8 billion compared with US$9.3 billion in the prior quarter. Assets under management reached US$577 billion at quarter’s end, a 25% increase from a year ago.

John Mack, chairman and CEO, said, “Morgan Stanley’s diversification across businesses and regions helped us deliver ROE of 17.2% this quarter, despite the impact of the severe market disruption on some areas of the firm — including our credit products, leveraged lending and quantitative strategies businesses. Even with these turbulent markets, Morgan Stanley still delivered strong performances across many core businesses and achieved record results in our prime brokerage, derivatives and interest rate and currencies businesses. In addition, we continued making progress in executing our growth plans and vastly improving performance in Asset Management and Global Wealth Management.”

“As always, the people of Morgan Stanley remain intensely focused on helping our clients navigate the constantly changing markets and seizing the opportunities they offer our clients and the firm. In the months ahead, we will continue to leverage our diverse, global franchise to create value for our clients and shareholders,” Mack added.