[R]1:00PM New York - Morgan Stanley third quarter earnings fell 7% after the group wrote down several loans linked to the U.S housing market.[/R]

Investment bank, Morgan Stanley reported that the third quarter net income dropped 7% to $1.5 billion from $1.6 billion a year ago. Diluted earnings per share from continuing operations fell to $1.38 from $1.50 in the same period a year ago. Analysts polled by Thomson Financial had expected the firm to earn $1.54 a share in the quarter. Compounded return on equity for the quarter fell to 17.2% from 23.2% in the comparative period last year.

But including results of Discover Financial Services, which was sold off in June, Morgan Stanley third quarter net profits plunged 17%. The group will pay a quarterly dividend of $0.27.

Tuesday, rival Lehman Brothers was the first to report earnings 3% lower earnings dragged by the ongoing financial markets crisis. Analysts expect to see more negative news in Bear Stearns and Goldman Sachs earnings due tomorrow.

For the first nine months of the year, Morgan Stanley said income from continuing operations rose 41% to $6.2 billion, from $4.4 billion reported in the same period in 2006. This translated into diluted earnings per share of $5.79 versus $4.12 last year. Net revenues rose 29% to $28.5 billion in the nine months.

Morgan Stanley fourth quarter earnings are expected to rise to $8.88 billion and to $39.2 billion for the full year. Analysts are expecting the sale growth in the fourth quarter to be near 4% and for the year to increase 16%.

Institutional Securities division pre-tax income fell 22% to $1.5 billion while net turnover rose 2% to $5 billion. The quarter''s pre-tax margin was 30% compared with 39% a year ago. Global Wealth Management Group''s profit before tax surged 78% to $287 million from a year earlier while Asset Management''s Q3 pre-tax income rose to $491 million from $155 million last year.

As of August 31, 2007, the company repurchased approximately 42 million shares of its common stock since the end of fiscal 2006. Total capital as of August 31, 2007 was $187.5 billion, including $40.1 billion of common shareholders'' equity, preferred equity and junior subordinated debt issued to capital trusts.

In early morning trade, Morgan Stanley stocks were up 0.1% at $68.90 in the U.S. Over the last 52 weeks, the share has traded in the range between $54.90 and $90.95. Analysts have still kept price target for the company of $87.08, which is likely to be revised lower if current credit market volatility continues. Against domestic peers, the financial group is third largest in market capitalization.

Morgan Stanley is trading at a market cap of $72 billion. JPMorgan Chase is the largest in the sector with a market cap of $161.82 billion and Goldman Sachs Inc has the second largest market cap of $81.33 billion. Morgan Stanley is trading at forward price to earnings ratio of 8.2.