Morgan Stanley has decided to hang onto its Discover credit card business after all, but will selloff aircraft leasing.

The firm announced that its board of directors has approved these moves with the intention of driving improved profitability, growth and returns to shareholders across its global financial services businesses. The company says it will retain Discover Financial Services, “as an important contributor to shareholder value”; and will sell its non-core aircraft-leasing business, AWAS, one of the world’s largest aircraft leasing companies.

The firm’s new chairman and CEO, John Mack, noted that the decisions on Discover and AWAS are initial steps toward improving the company’s performance. Mack also emphasized that one of his top priorities is to implement the initiatives announced late last month to significantly improve profitability in Morgan Stanley’s retail brokerage business.

“Morgan Stanley has tremendous strengths as a global financial services firm, but it is clear that our current level of profitability is unacceptable and we need to improve our performance,” Mack said. “We must be relentless in improving profit margins, growth and return on equity, while continuing to deliver innovative services to our clients. We have to ensure that the firm operates with the scale and flexibility to compete successfully in a fast-changing, competitive marketplace. We need to be smarter about using our capital efficiently as we continue to focus on risk management. We must also create a more cohesive culture by reducing bureaucracy and eliminating insular silos – all with the objective of shaping a ‘one firm’ mentality.”

In deciding to keep the Discover business, it noted that it: delivered record before-tax earnings of US$1.27 billion in 2004, representing 19% of Morgan Stanley’s total before-tax earnings and in excess of 19% ROE; boats a strong brand and a loyal customer base of 50 million; has significantly improved credit quality over the past three Years; and, is poised for new growth.

However, it also concluded that aircraft leasing is not a business that fits with the strategy. The company will take an after-tax, non-cash accounting charge of about US$1 billion in the third quarter to write down the value of this business to its estimated market value. The sale process will begin immediately, with the closing of a transaction anticipated in mid-2006.

The retail strategy will focus on the more profitable, wealthier client segments and on increasing its number of top-quality financial advisors to serve those clients. Yesterday, it announced that James Gorman is coming from Merrill Lynch to head the division. It is also taking specific actions to restructure and enhance the performance of the retail sales force, including increasing the effectiveness of its financial advisor training program, reducing headcount and working to generate new revenue streams, including banking and deposits.

Finally, it also elected three new directors: Roy Bostock, former chairman of BCom3 Group, one of the world’s leading advertising agencies; Charles Noski, former vice chairman of AT&T; and O. Griffith Sexton, an adjunct professor of finance at Columbia Business School and a long-time investment banker.