Morgan Stanley is reporting a 41% drop in third quarter net income. The substantial drop occurred before the impact of the recent terrorist attacks in New York.

Morgan Stanley say net income for the quarter ended August 31 was US$735 million, down 41% from the quarter last year. Third quarter net revenues were US$5.3 billion, 16% below a year ago. The annualized return on average common equity for the quarter was 15%.

The securities business posted net income of US$414 million, a 50% decline from last year’s strong third quarter. The decline reflected substantially lower levels of activity year-over-year in almost all the institutional and individual investor businesses. Fixed income continued to be the exception, although results were down from the record second quarter.

Higher fixed income revenues were driven by strength in government debt, investment grade debt and commodities trading. Interest rate cuts in the United States and Europe contributed positively to the results. The business also benefited from continued demand for investment grade issues and volatility in energy markets, although both were substantially lower than the second quarter.

Investment banking advisory revenues were US$360 million, down 30% from last year’s third quarter. The decline resulted primarily from the sharp decrease in global M&A activity that began late last year. Industry-wide, global completed M&A transaction volume fell 56% in the third quarter compared to a year ago. Underwriting revenues declined 34% from last year.

On the retail side, net revenues declined 20% to $1.1 billion as retail participation in equity markets remained sharply below last year’s levels. Net interest income was also lower as a result of a decline in margin debit balances. Revenues from asset management products and fee-based assets were modestly below year ago levels. The firm increased its number of global financial advisors to 14,342 at quarter end.

Investment management net income was $125 million, 36% below last year’s third quarter. The decline in earnings resulted from a decline in the company’s average assets under management and a shift from equity to fixed income and money market products.

Morgan Stanley chairman and CEO Philip Purcell and president Robert Scott said in a joint statement, “It is obviously difficult to focus on financial results in the aftermath of last week’s tragic events. However, we want investors to know that Morgan Stanley remains strong-not just financially, but also in terms of the will of our people, who have again proven their resilience.”

They noted that, “While concern has increased regarding the outlook for the global economy, we continue to believe in the long-term growth opportunities for the firm. Consistent with this belief, we announced earlier this week that the firm would be stepping up its share repurchase activities.”